U.S. credit market sells off on pulled financings
NEW YORK (Reuters) - A mounting backlog of failed buyout financings spurred a sharp sell-off in the U.S. credit markets on Thursday, intensifying concern that tighter credit conditions would damage the economy.
Spooked by pulled financings for the buyouts of DaimlerChrysler AG's Chrysler and Alliance Boots, investors scrambled out of riskier bonds, with the brokerage sector and junk bonds taking the worst hits, traders said.
In the junk bond market, buyers vanished and actively traded bonds went into free fall, with some benchmark auto bonds down five points on the day.
"Devastatingly bad" results from some home builders added to the negative tone, said Bill Featherston, managing director at J. Giordano Securities in Stamford, Connecticut.
"It's final capitulation," said Justin Monteith, market analyst for high-yield research firm KDP Investment Advisors in Montpelier, Vermont. "The news from the housing market is as bad as anyone could have imagined, and with the failure of the Chrysler and Alliance Boots fundings, that much paper is sitting on the banks' books."
Investment-grade corporate bond spreads, the extra yields they pay over safe Treasuries, widened by 5 to 25 basis points, traders said. Average spreads on Wednesday had hit their widest level since 2003, or about 112 basis points, according to Merrill Lynch data.
NO LENDING AT ANY PRICE
Home builders D. R. Horton and Beazer Homes USA Inc. both posted large quarterly losses on Thursday as the housing market's downward spiral continued to cripple orders for homes.
"We all knew when liquidity went away it wasn't going to be a gradual thing but all of a sudden people saying 'I'm sorry, I have no money to lend you at any price,'" Featherston said. "There's a lot more bad news than good news right now and it's putting a tremendous amount of fear in the market."
Liquidity, or cash available for debt sales and trading, has dried up as concerns intensified about contagion from subprime mortgages, home loans to borrowers with weak credit.
"Even though there's an abundance of money around, all of a sudden it isn't easy money, it's much more careful money," Featherston said.
Easy money and investor appetite for risk had underpinned the economy in recent years, keeping defaults low and fueling a record wave of acquisitions that supported stock prices.
In recent weeks, however, more than a dozen companies have had to pull financings as investors balked at buying the debt.
LIQUIDITY DRAIN SEEN CONTINUING
The chill in leveraged buyout activity has now become a "full-blown freeze," fixed-income research service CreditSights said in a report on Thursday.
"The syndicate banks behind the Chrysler and Boots deals are now saddled with $16.5 billion in loans that they must now manage on their own balance sheets," CreditSights said.
The same banks were already under pressure from their subprime holdings and other mortgage-related liabilities, CreditSights said.
U.S. credit default swap spreads widened dramatically on Thursday, with the main investment-grade index about 11 basis points wider at around 68 basis points, according to an analyst.
Persistent negative housing news also pounded U.S. agency debt, sending spreads on 10-year benchmark agencies about 7.5 basis points wider to about 65 basis points over Treasuries.
Subprime mortgage concerns also sent a benchmark asset-backed index to its lowest level this year. The ABX 07-1 "BBB-" index, which is tied to risky housing loans made in last year's second half, slid to 36 from 38.16 earlier on Thursday. The ABX 07-2 "BBB-" index, the newer series that reflects loans from 2007's first half, traded down to a record low 41 from 43.16 earlier on Thursday, traders said.
"If credit remains tight for long enough, it will affect the fundamentals of the economy, corporate profits and equity valuations," said KDP's Monteith. It is unclear now how long the tighter credit conditions will last, since the high-yield market can bounce back quickly at times, he said.
CreditSights said it expects the steady stream of bad news from the subprime sector to continue to drain liquidity from the markets.
"All the difficulties that have driven spreads wider in recent weeks ... are not about to fade away anytime soon," it said.
In the latest casualties of tighter credit conditions, Tyco Electronics Ltd. on Thursday said it was withdrawing a debt offering, while Russian gas export monopoly Gazprom postponed a sale of 30-year Eurobonds. Gazprom had already scrapped a 10-year issue that was part of the same deal.
(Additional reporting by Nancy Leinfuss and Neil Shah)
