http://www.zerohedge.com/news/2013-05-31/will-sallie-maes-break-end-cov-lite-cravings
Submitted by Tyler Durden on 05/31/2013 21:18 -0400
Submitted by Tyler Durden on 05/31/2013 19:59 -0400
Submitted by Tyler Durden on 05/30/2013 20:19 -0400
Will Sallie-Mae's Break-Up End The Cov-Lite Cravings?
Over the past few months we have explained in detail just how 'frothy' the credit market has become. Probably the most egregious example of this exuberance is the resurgence in covenant-lite loans to record levels. It seems lenders are so desperate to get some yield that they are willing to give up any and all protections just to be 'allowed' to invest in the riskiest of risky credits. With credit having enjoyed an almost uninterrupted one-way compression since the crisis, momentum and flow has taken over any sense of risk management - but perhaps, just perhaps, Sallie-Mae's corporate restructuring this week will remind investors that high-yield credit has a high-yield for a reason. The lender's decision to create a 'good-student-lender / bad-student-lender' and saddle the $17.9bn bondholders with the unit to be wound-down, while as Bloomberg notes, the earnings, cash flow, and equity of the newly formed SLM Bank will be moved out of bondholders’ reach. Bonds have dropped 10-15% on this news - considerably more than any reach-for-yield advantage would benefit and we wonder if these kind of restructurings will slow the inexorable rise in protection-free credit.
Via Bloomberg,
SLM Corp. (SLM) dealt bondholders a blow as the student loan company prepares to move cash-generating assets out of their reach and rely more heavily on secured funding as it seeks to split into two separate entities....Sallie Mae is separating its education loan business from its consumer lending operation, following legislation in 2010 that cut companies out of the government-guaranteed student loan market. The lender’s $17.9 billion of unsecured bonds will be serviced by the company housing Sallie Mae’s $118 billion portfolio of U.S.-backed loans that it’s winding down, while the earnings, cash flow and equity of the newly formed SLM Bank will be moved out of bondholders’ reach, according to Moody’s.“Anytime you split a company up like this and some portion of the cashflows that could have been available to support debt payments is no longer available, it is incrementally negative for bondholders,”...“The company is going in thewrong direction in terms of building balance sheet strengthwith what we consider an over-emphasis on returning capital to shareholders,” Peter Thornton, a credit analyst at KDP Investment Advisors Inc., wrote in a research note yesterday. “Unfortunately for Sallie Mae creditors, all of the current unsecured debt will stay at” a newly formed entity that contains the government-guaranteed debt while the “more promising future businesses” are stripped....“What they are spinning off is the higher-risk profile business; what is staying behind is the steady cashflow business,” he said.
And so - by slaying bond holders, the firm manages to benefit shareholders. All sounds great for the equity bulls until one realizes that there is a limit to this kind of action - once credit starts to reprice to this more activist perspective, then the capital structure will necessarily reduce the value of future 'equity' cashflows and weigh on earnings (interest expense). Simply put there is no free lunch for stocks at the expense of credit - it is a lead-lag relationship - not a win-lose...
and credit has been leading the turn...
http://www.zerohedge.com/news/2013-05-31/ben-bernanke-capital-may-pl-115-billion
Ben Bernanke Capital May P&L: ($115) Billion
For all the attention paid to the 1.9% drop in PIMCO's $293 billion Total Return Fund in the month of May following one of the worst months for bonds in a long while, perhaps a far more important question is what happens when one mixes the world's largest actively managed, fixed income portfolio, that of the $3.4 trillion hedge fund located at 33 Liberty Street, and its DV01 of over $2.5 billion, with the 46 bps move in the 10 year in the month of May, and gets a P&L of ($115) billion, or double the said hedge fund's total capital.
The hedge fund in question is of course the Federal Reserve Bank.
While no LPs, aka taxpayers will be concerned at the biggest ever monthly "loss" of 3.5% just yet, because it is simply on "paper", at what point will that most precious of central bank commodities - fiath that the bald man behind the curtain knows what he is doing - start running in short supply? And, even worse, how long before the Fed has to start paying ever more and more reserve interest to the same banks (the majority of which are foreign) so reviled for being bailed out in the first place, until one day, it goes cash flow negative and has to request a bailout from the US Treasury and thus, the US people?
http://www.zerohedge.com/news/2013-05-30/icecap-asset-management-bernankes-bouncing-ball
IceCap Asset Management: "Bernanke's Bouncing Ball"
Contrary to popular belief, Bozo wasn’t the first clown to drop the ball. That honour goes to 16th century jester William Sommers simply told one joke too many, and before he knew it, both his juggling balls and his head were hitting the floor at the same time. Today, we have the making of the biggest financial clown of all time. As head of the world’s most powerful institution, the US Federal Reserve, Ben Bernanke has lobbed one giant money ball into the global financial system. This ball continues to bounce along one market to the other, and so long as it doesn’t touch the ground everyone is happy. Yet, should this ball grow so large it cannot be supported, one simple slip will be unfortunate for everyone. To follow the interconnectedness of markets, just follow Bernanke’s bouncing ball.
Via IceCap Asset Management's Keith Dicker,
...A poor earnings season – stocks zoom higher. Bad US manufacturing reports – stocks leap higher. Deeper and broadening recessions in Europe – stocks skyrocket even higher if that’s possible. Talk about a honey badger market – today’s stock market really doesn’t care, about anything....Of course, we can only have two outcomes:either the real economy (the one with real people, real jobs, and real income) also zooms upward,orthe stock market zooms back to reality.Which naturally raises the question – “who’s zooming who”?To answer the question, look no further than the talking heads.Whereas a few short months ago, experts on the Cypriot banking system crawled out of the woodwork. Today we have the same experts talking about the accelerating recovery and the soon to come economic nirvana.While “nirvana” sounds a little too easy for today’s money masters to master, the newest and most used term by anyone with 30 seconds of fame is “accelerating recovery”.Everywhere we read, watch and listen, these magical words dance through the air. Unsurprisingly, this newest and coolest term originated in America. But don‘t despair, pretty soon Europeans of all sorts will move along from chanting “the worst is over” and graduate to their very own “accelerating recovery”.Now as most people rarely read beyond the headlines, or question whether anything in print or full of pixels is anything but true, it’sworthwhile to actually dig around for evidence of this accelerating economy.
To get a 'glimpse' into the real world, IceCap's Full Presentation is below:
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