News flash!: Dead Tree Media unearths connection between subprime and corporate debt

In case you missed it, here is an excerpt from a June 27-07 article by Globe & Mail columnist Fabrice Taylor on the U.S. debt market:

Lest you think you’ll escape any damage because you have no investments related to U.S. housing, think again. Subprime gets a lot of press, but it’s a small part of the overall repackaged debt industry. Where do you think some of the debt issued for aggressive buyouts ends up? Or binges of consumer spending?

There will be shocks, both in terms of asset writedowns and lower earnings or losses. More important, though, is that asset prices themselves will fall if investors learn the hard way that they mispriced the money they’ve been lending and, in true form, turn the spigots off entirely.

There’s a theme we’ve touched on time and again over the past five months. “Moodys worried about slide in lending standards“, April 12-07:

“While times may be better, the credit market is still like a coiled spring. We’ve talked in the past about the credit market being one masive ecosystem, and not discrete little elements that aren’t affected by pain suffered in another part of the market.

And according to one of the world’s largest credit raiting agencies, lax credit standards isn’t solely a problem for firms that gave mortgages to folks with poor credit ratings, or at loan-to-value levels that exceeded 100%.

You have to admit that the idea of “laying off risk” sounds so appealing, but eventually someone, somewhere winds up owning the underlying paper. In our business, we retain all of our credit risk, but manage that loan risk by not utilizing massive leverage on the portfolio. One of the benefits of keeping loans on your own books is that you get to maintain the relationship with the borrower (and the management team), which is one of the most enjoyable aspects of our business.

But if anyone thought that the sub prime-inspired credit mess was really over, Moody’s has decided to tackle the commercial mortgage market before they get blamed should things start to go south there.

Which begs the question: how long before the senior risk managers at the commercial banks decide that they need to tighten their own credit books just a titch?”

And there was our March 18-07 post “More subprime fallout at HSBC” (excerpt follows):

“It appears that HSBC is no longer as interested in tax refund lending, either, having been one of the first to be burned on subprime (as discussed here last month).

If you are banking on a continuation of an accomodating credit market, it can’t come as a surprise that credit concerns in one area of the economy will seep into others…even the 2008 tax refund loan sector.”

Then there was the piece in Barrons on March 17, 2007, referring to the contracting corporate senior debt market (according to several market participants, including us) in the wake of the problems in the subprime lending market.

The other dozen posts on the interplay between the subprime meltdown and the corporate debt market, LBO activity, and bank risk management behaviour can be found on our Lending Tutorial section.

But, rest assured, we aren’t going to give up our day jobs.

MRM