Just when you thought it couldn't get much worse for the buyout loan market and the banks stuck holding loans for private-equity takeovers such as BCE Inc., it has. And believe it or not, some of it is Iceland's fault.
How is it that a speck in the North Atlantic that's home to fewer people than Quebec City could drive another nail into the foundering market? It turns out the overblown banking sector in the country was a big provider and holder of buyout loans, and now that the banking sector is in disarray, many of those loans went on sale last week.
Hundreds of billions of dollars of loans, in fact, went up for auction as so-called "bid lists" are circulated to potential buyers. It's the banking sector's equivalent of a contents sale when someone is evicted from their house. Supply is swamping what little demand there was.
Combined with the drop in expectations for the global economy, which leads to default fears, that's driven the price of an average buyout loan even lower. The average discount to face value is now almost 30 per cent, with leveraged loans trading at about 70 cents on the dollar, according to Standard & Poor's. Sixteen months ago, they were trading at face value.
The carnage is now spreading, as other holders of the loans run into trouble because of the price drop. Bloomberg News is reporting that a major hedge fund is winding down after its bankers seized a package of loans. Those, too, are now for sale.
Oh, and I almost forgot to mention: Investors with an appetite to buy (if there are any) can also choose baskets of loans with built-in loss protection in the form of a senior tranche of a so-called collateralized loan obligation at something close to 60 cents on the dollar thanks to a fear of any financial derivative.
For the banks on the hook for big buyout loans -and BCE Inc. is the biggest of them all - this is just more bad news. They negotiated an extension in the closing date to year-end in hopes that the market would get better, and so far that strategy is going all wrong.
They can, and do, argue that BCE is a good credit and is unlikely to default, therefore the price should be a lot higher. In fact, BCE has been making money all year and piling up cash, further solidifying the loans. And theoretically, the bankers are probably right. But that's not going to wash with potential buyers, who say that there's no good reason to buy any BCE debt when all the other loans are circulating at such low prices.
