Money Heaven

Bloomberg is reporting, “Record Sales of Riskiest Debt”:

“U.S. companies one step away from default are selling a record amount of bonds.

“Jostens Inc., the biggest maker of school rings, and a Hard Rock Intl. Inc. affiliate are among borrowers rated CCC or lower who offered $20 billion of debt since December. The sales are the most since at least 1999, when Bloomberg began compiling the data, and are four times the amount from a year ago.

“Investors are buying the worst-rated junk bonds on speculation the fastest economic growth since 2003 will keep default rates near historical lows. The companies can sell debt at yields about 6 percentage points more than Treasuries, the narrowest since 1997, according to Merrill Lynch & Co. data.

“‘It’s a favorable environment,’ said Steve Goodwin, chief financial officer of HRP Myrtle Beach Holdings LLC, which has a license agreement with Hard Rock International Inc. to build and operate the $400 million, 140-acre Hard Rock Park in South Carolina. ‘It’s a critical point where we’re about to break ground, and we want all of the financing completed.'”

How Much Sillier Can It Get?

So…$20 billion is going to makers of high school rings, to Hard Rock Park, and other such nonsense. Every day I ask myself the same question: “How much sillier can it get?”

“‘It’s a favorable environment,’ said Steve Goodwin, chief financial officer of HRP Myrtle Beach Holdings LLC.”

A favorable environment? Interest rates are rising and we are three years into a recovery with real wages falling, bankruptcies and foreclosures rising, and the economy led by housing slowing. One has to have real imagination to call this environment favorable. Any company struggling now is in deep trouble headed into the next recession. I suspect much of that $20 billion is headed to “Money Heaven.”

What Is Europe Doing?

A telepathic question just came in. “Mish, is this insanity happening just in the United States?” Hmmm. Good question. Let’s see what we can find.

On March 31, Reuters reported, “Hedge Funds Flock to Riskiest Derivatives”:

“European hedge funds are piling into the riskiest parts of complex structured derivatives as pressure to generate higher returns offsets concern over interest rates and record levels of mergers and acquisitions.

“Dealers report a rise in sales of equity tranche protection in synthetic collateralized debt obligations (CDOs), the same investments that were hit last year following the downgrades to junk of U.S. auto makers Ford and General Motors.

“Sellers of CDO equity protection agree to reimburse buyers for the first 3% of defaults in a portfolio of up to 125 companies. The investments are lucrative because they are risky — just one default can cause a 20% loss.

“So difficult to gauge are equity tranches that they are unrated, while premiums are paid on a upfront basis, rather than the normal running premium elsewhere in CDOs.

“Still, money has been flowing in, with hedge funds in the vanguard, as low returns elsewhere in structured credit push managers into riskier strategies.

“‘The equity shows exceptional value relative to senior tranches,’ said David Peacock, co-head of credit at Cheyne Capital. ‘An overweighting of money has gone higher up the capital structure into rated tranches (in recent months), but that has pushed spreads there too tight.’…

“The sudden renewal of interest has pushed the upfront cost of selling protection lower. The premium on the iTraxx Series4 five-year equity tranche has fallen to 22.6 points in recent trade, compared with 26 points a month ago, and around 65 points following the U.S. auto downgrades last year.

“Another way to interpret the move into equity is that investors are once more comfortable with exposure to idiosyncratic risk, or the chance of one-off defaults…

“‘You might say that these moves represent a shift in fundamental views, but what you have to remember is that these are highly technical markets,’ said Lorenzo Isla, a strategist at Barclays Capital. ‘What these investors are thinking about is relative value within the CDO universe — the fundamentals come second.'”

Have I got this right: fundamentals come second and relative value within the CDO universe comes first? Excuse me, but what kind of logic is that? Perhaps I do not know enough about European markets. Can someone tell me if a gun is put to hedge fund managers’ heads in Europe such that they have to invest within “the CDO universe”? If not, then why are fund managers looking for “relative” value, as opposed to just plain “value”? Is more money going to Money Heaven over this? You bet. Does anyone seem to care right now? No.

Florida Condo Crashes

How many subcontractors went under when South Florida developer Ceebraid-Signal threw in the towel and filed Chapter 11:

“The developer has been besieged by contractor lawsuits claiming unpaid bills and angry buyers of condo conversions who’ve been stalled on unit delivery. Liabilities could top the $100 million mark, according to real estate pros.

“In a related matter, several deals and condo conversions involving Ceebraid-Signal, now in limbo because of the bankruptcy are: the unfinished Eden condo conversion in Boca Raton that’s been stalled since Hurricane Wilma; the Palm Beach Hilton and the Gulfstream Hotel in Lake Worth valued at $58 million; and the high-profile conversion of the Brazilian Court Hotel in Palm Beach has been halted amid an avalanche of lawsuits and building code violations.”

I wonder how many subcontractors went under in this mess. Regardless, this is the tip of the iceberg when it comes to money going to Money Heaven. The real party starts with the unwinding of the credit derivatives bubble. Brace yourself for it, because it is coming.


Mike Shedlock ~ “Mish”
April 9, 2006

Headline(s) of the week:

“Snow Is Loyal, but It May Not Be Enough” ~ Washington Post

“China on U.S. spending spree” ~ Seattle Times

Quote of the week: “The five-year commodity price boom that has catapulted metal, energy and some agricultural prices to record highs is set to extend further, driven by global economic growth, tight supply and rising inflows of investment, according to investors, mining groups and sector analysts.” ~ Yahoo! News

Greg’s Note: You might want to check out Agora Financial’s resource newsletter, Outstanding Investments. It’s the number one newsletter in the entire industry over the last 5 years — as rated by independent watchdog Mark Hulbert. Look here for more info…

Chart of the week:
(courtesy of CalculatedRisk)


The Daily Reckoning