I keep hearing pundits talking about fixing the banks, but the banks are lending, what is not functioning, at all, is the secondary market, aka the shadow banking system.
The first striking element of this report (from mid 2007, nearly 2 years ago!) is the over 50% increase in leveraged loans coming due in 2010-2014 vs 2009, from ~$120B to ~$200B. We currently are in the proverbial eye of the storm for the hurricane of leveraged loans coming due.
In a normal market, this would not matter, the loans would simply be rolled over. Unfortunately, the secondary market for this type of loan product, which is almost always below investment grade or the lowest investment grade (BBB), is more or less dead.
This poses an enormous problem for all the leveraged buyouts that occurred in the 2003-2007 timeframe. The cashflow from the loans may cover interest payments, but when the loans come due, the assumption has always been that rollover funds will be available, at some interest rate, but we are encountering situations where said funds are not available at ANY interest rate.
This will likely lead to asset sales, in an already depressed market, which will further lower the value of the assets held on the books of other companies (mark to market), which will erode market confidence which will further impact the functioning of capital markets and so on and so forth. These events may lower credit ratings and trigger painful covenants for lines of credit as well as create tremendous operating difficulties for these firms in terms of short term credit needs.
Notice the last page of the report..and this is critical... banks have made up a small fraction of the lending in recent years.
In fact, the first words of page three read: "Many highly leveraged firms rely on their ability to roll over existing loan debt rather than repay it at maturity; something they often lack the financial resources to do. In fact, for riskier borrowers, the ability to tap the loan market for liquidity can be of significant importance in maintaining solvency and avoiding default"
It goes on to state "Non-bank institutional investors, such as CLO's and hedge funds, have become a driving source of liquidity in the leveraged loan market. In 2006, institutional issuance account for about 60% of all leveraged loan issuance."
Well, we know where most of the hedge funds and CLO's are, either dead or in hiding.
What's worse is the coincidence of leveraged loan maturation with high yield junk bond maturation. "Refunding needs for junk-rated U.S. issuers more than doubled to $190 billion over the next three years, the highest figure recorded since Moody’s began its annual study 11 years ago. Refunding needs were just $86 billion in last year’s study.The $190 billion of maturing bank facilities and bonds includes $26 billion due in 2009, $44 billion due in 2010, and $120 billion due in 2011, Moody’s report said."
This compares to $13 billion in junk bond refunding in 2008.
The problem is not one of banks, it's one of the secondary markets, which are all but dead, and for which there is a fat chance in hell that the government would step in and back (since they are painted as the evildoers responsible for the current situation).
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