Axed deals reflect subprime chill
By Lina Saigol and Joanna Chung in London and Richard Beales in New York
Copyright The Financial Times Limited 2007
Published: June 27 2007 19:37 | Last updated: June 27 2007 23:53
Companies are pulling financing deals across the globe, in one of the clearest signs yet that investors’ worries about rising interest rates and US subprime mortgages could be infecting other areas of the credit world and driving up the cost of corporate borrowing.
MISC, the world’s biggest owner of liquefied gas tankers, day shelved its $750m bond offering.
on signs of growing buyer resistance in the leveraged buyout market
The move came a day after US Foodservice, the American division of Ahold, the Dutch supermarket group, postponed its $650m bond offering and Arcelor Finance put plans for its euro-denominated benchmark bond issue on hold, citing turbulent market conditions.
The bonds and loan deals were pulled after investors refused to buy them under the proposed terms, demanding higher premiums and more protection.
Stephen Green, chairman of HSBC, on Wednesday fuelled investor concern when he suggested that some large corporate deal would collapse because of over-leverage. In an interview with the Financial Times, he said he was “worried by the degree of leverage in some big ticket transactions nowadays” and felt that “something is going to end in tears”.
He also warned that losses could be higher because the parcelling out of risk to so many parties across the financial system could make it more difficult to arrange a rescue – a comment that highlighted widespread and growing unease among senior banking executives.
The pulled deals highlight the growing risk-aversion among investors amid rising global interest rates and nervousness about credit markets following the near-collapse of two hedge funds owned by Bear Stearns that have heavy exposure to the US subprime market.
Many investors are now reassessing risk, which could force up the cost of doing deals and cause a sharp slowdown in private equity activity.
Investors appear to be rejecting deals involving the riskiest structures, including payment-in-kind or Pik notes – which allow borrowers to pay investors with more bonds rather than cash – and “covenant-lite” loans – which offer less protection to investors.
Although the subprime market is only a small corner of the credit world, developments there have fuelled unease in other financial sectors – and, in particular, raised questions about the valuations of complex and illiquid securities.
This is particularly true of collateralised debt obligations, or CDOs, which allow lenders to pass on the debt by slicing it up into tranches and bundling it together to sell on to investors.
Amitabh Arora, New York-based head of interest rate strategies at Lehman Brothers, said: “The bigger risk now is that it calls into question CDOs as a financing vehicle in the corporate credit market.”