The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about $28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value, according to Reuters LPC.
Loans of Freescale Semiconductor Inc., taken private by a consortium of private-equity firms in December 2006 for about $28 billion, are trading at a 15.5% discount to their original value; Tribune Co., which was taken private in April by investor Sam Zell for $8.2 billion, issued loans now trading a 26% discount.
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Double-digit declines in the market value of these loans are very unusual, and a big problem for many banks, which sit on a pipeline of $152 billion in loans that they have promised to make but have yet to sell to investors.
With the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do.
Yesterday I wrote about the latest Federal Reserve loan survey, which shows the market for credit is tightening to levels not seen since the last recession (and in some cases the situation is worse than the last recession). Now we have more evidence that the credit markets are in serious trouble.
It's news like this that make the "earnings outside of financials are great" argument so incredibly dangerous. Think about the broad implications of this situation. Last spring one of the big events moving the markets was leveraged buyouts. The inability of banks to move loans off their books at a decent price makes buyouts incredibly difficult if not outright impossible. That prevents an important bullish situation -- namely M&A -- from developing. It also makes financing in general more difficult.
