Wednesday, March 2, 2016

Rush To Borrow... the first recipients of cheap money look to rollover or refinance a new loan that is coming due between now and early 2017. The first look shows that $88 B is needed, however many of those loans fell under junk bond status. The problem is twofold. One, the rates are now higher and secondly, the lending market is tighter. Just ask Sand Ridge Energy or Energy XXI? The two oil companies missed their interest payment and no one is willing to restructure their loans which will be in default in March. Those two over leveraged companies are not alone. Standing in line are 47 other energy and oil producers. The rubber stamp that said, "Yes, approved," just  five years ago, now says, "No! Denied!"
Toys 'R Us
is also in the line. Two aspects are revealed in their quest for another $1.B plus loan. One, they had to utilize the junk loan category the first time and this time, they are having difficulties in getting new finances.
Banks, who bought Collateralized Loan Obligations(CLOs) are seeking to unload the risky debt, but now, higher rates have put pressure on them because with the timing of the rates increases and market jitters. These banks and lending institutions have $88 B coming due and losses are looming. The majority of the loans are related to oil and energy. The low price for oil are making payment of loans not applicable. Losses are revealed in the value of these loans with some down substantially.
Underwriters may be forced to eat losses or to sell at a steep discount. In this scenario banks are pulling back just as this mass of debt is hitting the market. Bank of America, the largest underwriter of leveraged loans, has tightened the ship. It previously forecast $70 B of applications. Now, it will trim that number to $45 B. One reason for this:
No One In The Store.
There are no buyers for their CLOs. In addition, credit rating agencies have downgraded these loans. These downgrades are up 126% for the fourth quarter of 2015. More companies are being labeled junk as CCC tier loans rose 3.9% in January. Bonds rated B lost 21% last month. This shows contagion is spreading.
Dodd-Frank Rules
dictate that issuers must now be able to cover 5% of the debt that they create. On the other side, borrowers cannot meet the standards needed for new loans. All in all debt seekers will have to pay a higher rate and price for new financing. As it is, they barely met the "old" standard. The only one making money is the coffee guy who has a long line waiting for service, but I suggest this to the jo server, get cash!