U.S., U.K. Move Closer to Losing (AAA) Rating, Moody’s Says

[Marcus Bryant]

http://www.bloomberg.com/apps/news?pid=20601068&sid=a0a8xAghPS8I

[ElNono]

So, is defaulting on our Chinese debt an option?

[boutons_deux]

Is this the same Moody's that rated all that toxic shit during the housing bubble as AAA? :lol

[DMX7]

Is this the same Moody's that rated all that toxic shit during the housing bubble as AAA? :lol

Yes.

[RandomGuy]

Interesting.

"substantially" closer to being downgraded, but still not listed as likely to cross the line.

[coyotes_geek]

So, is defaulting on our Chinese debt an option?

I don't think we have to worry about that.........at least not yet..........but the possibility of a downgrade is still something we need to be very concerned about. A downgrade would mean the govt would have to pay higher interest rates on the money they borrow, thus making it that much tougher to reduce defecits.

[George Gervin's Afro]

I don't think we have to worry about that.........at least not yet..........but the possibility of a downgrade is still something we need to be very concerned about. A downgrade would mean the govt would have to pay higher interest rates on the money they borrow, thus making it that much tougher to reduce defecits.

Substantially higher rates, correct?

[coyotes_geek]

Depends on the size of the downgrade, but potentially yes, substantially higher rates.

[RandomGuy]

Depends on the size of the downgrade, but potentially yes, substantially higher rates.

Any downgrade for the US government from aaa would be bordering on catastrophic.

[boutons_deux]

paranoid dumbfuck dupes are whining about the non-existent socialism threat, while CAPITALISM'S catastrophe is REAL and GROWING.

=================


DealBook - A Financial News Service of The New York Times
March 16, 2010, 2:39 am

Junk Bond Avalanche Looms for Credit Markets


When the Mayans envisioned the world coming to an end in 2012 — at least in the Hollywood telling — they didn’t count junk bonds among the perils that would lead to worldwide disaster, Nelson D. Schwartz writes in The New York Times.

Maybe they should have, because 2012 also is the beginning of a three-year period in which more than $700 billion in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could overload the debt markets.

With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies.

The United States government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt.

Indeed, worries about the growth of national, or sovereign, debt prompted Moody’s Investors Service to warn on Monday that the United States and other Western nations were moving “substantially” closer to losing their top-notch Aaa credit ratings.

Sovereign debt aside, the approaching scramble for corporate financing could strain the broader economy as jobs are cut, consumer spending is scaled back and credit is tightened for both consumers and businesses.

The apocalyptic talk is not limited to perpetual bears and the rest of the doom-and-gloom crowd.

Even Moody’s, which is known for its sober public statements, is sounding the alarm.

“An avalanche is brewing in 2012 and beyond if companies don’t get out in front of this,” said Kevin Cassidy, a senior credit officer at Moody’s.

Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.

That is because the record number of bonds and loans that were issued to finance those transactions typically come due in five to seven years, said Diane Vazza, head of global fixed-income research at Standard & Poor’s.

In addition, she said, many companies whose debt matured in 2009 and 2010 have been able to extend their loans, but the extra breathing room is only adding to the bill for 2012 and after.

The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2014.

The credit markets have gradually returned to normal since the financial crisis, particularly in recent months, making more loans available to companies and signaling confidence in the pace of economic recovery. But the issue is whether they can absorb the coming surge in demand for credit.

As was the case with the collapse of the subprime mortgage market three years ago, derivatives played a big role in the explosion of risky corporate debt. In this case the culprit was a financial instrument called a collateralized loan obligation, which helped issuers repackage corporate loans much as subprime mortgages were sliced, diced and then resold to other investors. That made many more risky loans available.

“The question is, ‘Should these deals have ever been financed in the first place?’ ” asked Anders J. Maxwell, a corporate restructuring specialist at Peter J. Solomon Company in New York.

The period from 2012 to 2014 represents payback time for a Who’s Who of private equity firms and the now highly leveraged companies they helped buy in the precrisis boom years.

The biggest include the hospital owner HCA, which was taken private in 2006 by a group led by Bain Capital and Kohlberg Kravis & Roberts for $33 billion, and has $13.3 billion in debt payments coming due between 2012 and 2014. Another buyout led by Kohlberg Kravis, for the giant Texas utility TXU, has $20.9 billion that needs to be refinanced in the same period.

Realogy, which owns real estate franchises like Century 21 and Coldwell Banker, was taken private by Apollo in the spring of 2007 just as the housing market was beginning to unravel and as the first tremors of the subprime crisis were being felt.

Realogy was saddled with $8 to $9 of debt for every $1 in earnings, well above the “$5 to $6 level that is manageable for a company in a highly cyclical industry,” according to Emile Courtney, a credit analyst with Standard & Poor’s.

Realogy has survived — barely. “The company’s cash flow is still below what’s needed to cover the interest on its debt,” Mr. Courtney said.

Realogy said it ended 2009 with a substantial cushion on its financial covenants and over $200 million of available cash on its balance sheet. “The company generated over $340 million of net cash provided by operating activities in 2009 after paying interest on its debt,” the company said.

Not everyone is convinced that 2012 will spell catastrophe for the junk bond market, however.

Optimists like Martin Fridson, a veteran high-yield strategist, note that investors seeking high yields snapped up speculative-grade bonds last year and early this year, and he suggests that continued demand will allow companies to refinance before their loans come due.

“The companies have nearly two years to push out the 2012 maturity wall,” he said. “Of course, the ability to refinance will depend upon the state of the economy.”

That is still a wild card, but even if the economy improves, companies with a lot of debt will be competing with a raft of better-rated borrowers that are expected to seek buyers of their debt at around the same time.

Chief among those is the best-rated borrower of all: the United States government. The Treasury Department estimates that the federal budget deficit in 2012 will total $974 billion, down from this year’s $1.8 trillion, but still huge by historical standards.

Most critics of deficit spending have focused on the budget gap alone, but Washington will actually have to borrow $1.8 trillion in 2012, because $859 billion in old bonds will come due and have to be refinanced in addition to the deficit. By 2013 and 2014, $1.4 trillion will have to be raised annually.

In the late 1990s, the federal government ran a surplus and actually paid down a small portion of the national debt. But with the huge deficits of the last few years, the national debt has grown to more than $12 trillion.

Next in line are companies with investment-grade credit ratings. They must refinance $1.2 trillion in loans between 2012 and 2014, including $526 billion in 2012. Finally, there is the looming rollover of commercial mortgage-backed securities, which will double in the next three years, hitting $59.7 billion in 2012.

Even if most of the debt does get refinanced, companies may have to pay more, if heavy government borrowing causes rates for all borrowers to rise.

“These are huge numbers,” said Tom Atteberry, who manages $5.6 billion in bonds for First Pacific Advisors, and is particularly alarmed by Washington’s borrowing. “Other players will get crowded out or have to pay significantly more, because the government is borrowing so much.”

http://dealbook.blogs.nytimes.com/2010/03/16/junk-bond-avalanche-looms-for-credit-markets/?pagemode=print

[EVAY]

When I worked in finance, I used to have to deal with folks from Moody's and from Standard and Poor's from time to time. I was never fond of any of them, but the Moody's guys were consistently an unfortunate combination of arrogance and smugness, without any accompanying high level of competence with which to offset the unpleasantness.

Just look at what they said...they said it won't happen, but you're close to it happening! It is like a bully cracking his knuckles to try to get a rise out of the gallery.

[mogrovejo]

LOL at people blaming the rating agencies. In Europe some guys wanted to create government agencies to replace them. Maybe that's an idea worth pursuing by the liberal meatheads in the US as well.

A downgrade in the US ratings would make credit more expensive to guys like you, it wouldn't affect solely the government rates.

[Wild Cobra]

A downgrade in the US ratings would make credit more expensive to guys like you, it wouldn't affect solely the government rates.
That does not compute.

Explain please.

[EVAY]

LOL at people blaming the rating agencies. In Europe some guys wanted to create government agencies to replace them. Maybe that's an idea worth pursuing by the liberal meatheads in the US as well.

A downgrade in the US ratings would make credit more expensive to guys like you, it wouldn't affect solely the government rates.

Conservative and liberal economists alike have called out the rating agencies for doing such a poor job of properly assessing risks of the 'tranched' mortgage derivatives during the bubble years. Most thoughtful financial experts of whatever political persuasion have noted that the rating agency personnel were, if not 'asleep at the wheel', then actively complicit in the deception regarding the extent to which the Credit Default Swaps and 40-to-one debt to asset ratios were undermining the balance sheets of some of the largest financial institutions in the world. In fact, the folks at Moody's etc., bought into the "the housing prices will continue to go up and up and up and...". They should have called people on it. They didn't. Either they didn't understand how to interpret the risk in front of them, or they hoped to get on board at one of the firms that they rated.

There is absolutely nothing sacrosanct about Moody's and Standard and Poor's. I can't imagine why you would want to defend them. Have you ever worked with any of them?

The fact that there is enough blame for the financial meltdown to go around for banks, financial institutions, the Federal Reserve System and Congress does not mean that the rating agencies don't have to pony up for their share of it.

[EVAY]

That does not compute.

Explain please.

Are you being sarcastic?

[DMX7]

That does not compute.

Explain please.

U.S. gov would have to borrow at higher rates from other countries because it would be considered a higher risk loan, then the U.S. would have to loan to Americans and other institutions at higher rates (in theory, but it's not necessarily true).

[Nbadan]

As i've shown before, A lot of that debt is money we owe to ourselves, mostly the Social Security trust fund, so those trillions of dollars in debt are really future obligations to provide income security and health-care to retirees...that's one of a myrid of reasons why we need health insurance/health-care reform...to effectively write-off this future burden to taxpayers as well as control the runaway rising costs of health-care ...

[coyotes_geek]

that's one of a myrid of reasons why we need health insurance/health-care reform...to effectively write-off this future burden to taxpayers as well as control the runaway rising costs of health-care ...

Anyone who believes that spending trillions of dollars to create a new entitlement program is going to take care of the tens of trillions of dollars of unfunded liabilities in the current entitlement programs is a lunatic.

[RandomGuy]

That does not compute.

Explain please.

Private sector borrowing is almost invariably pegged either formally or informally to the rate the US government gets.

The US government is presumed to be virtually default risk-free, so the term for the rate the US gov't gets is the "risk-free" rate.

You can think of interest rates in terms of an additive equation.

Remember, in finance risk = rate (interest rate)

r= risk free rate,
i= interest rate risk (risk that rates will fall rise during the course of the loan and you have "locked" yourself into the % interest in this loan, unable to take advantage of higher rates)
d= default risk
o= other risks

Your borrowing rate:
r+i+d+o

Government borrowing rate:
r + i

[Wild Cobra]

Private sector borrowing is almost invariably pegged either formally or informally to the rate the US government gets.

That may be true, but I have heard several times it is an unnecessary tie. Some banks will lend against their own assets and borrowers risk which will not be driven by bond rates. Competition between banks for good loans will keep rates down.

At least that's how I understand it. I could be wrong.

[LnGrrrR]

I know that this would hurt alot of people, but I would actually like to see credit be harder to get, mainly to prevent monumental catastrophes like this one. I mean, loaning out credit to unreliable people is pretty ridiculously stupid.

Of course, I also wish that the people who made these stupid decisions went up in flames, and weren't bailed out.

Really, it's a strong reminder that while people in certain professions may have alot more KNOWLEDGE in a field, they can certainly be a hell of a lot dumber, collectively, than I am.

[Wild Cobra]

I know that this would hurt alot of people, but I would actually like to see credit be harder to get, mainly to prevent monumental catastrophes like this one. I mean, loaning out credit to unreliable people is pretty ridiculously stupid.

Of course, I also wish that the people who made these stupid decisions went up in flames, and weren't bailed out.

Really, it's a strong reminder that while people in certain professions may have alot more KNOWLEDGE in a field, they can certainly be a hell of a lot dumber, collectively, than I am.

We are in agreement here. Those banks should have been forced to reorganize or fold. Those banker CEO's responsible should have lost their jobs. The healthy banks would have taken up the slack.

Didn't I say that from the start of all this?