Real Look at the ‘Credit Market’

Posted on November 4th, 2008 in Daily Stock Market / Economic News - The Real Story, Mr Mortgage's Personal Opinions/Research

The credit markets remain unprecedentedly tight despite what you hear by the popular media on how the TED spreads, swap spreads, LIBOR/OIS etc etc are improving.   These are just indicators and everyone has their favorite. Their movement from Armageddon levels absolutely does not mean that we will get a thaw in commercial or consumer lending anytime soon.

Instead of looking at sometimes artitrary indicators, just look at what’s going on in the real market. One will argue that ‘just by virtue of these deals going off at all means things are great’.  I say ‘no way!’  If Verizon, one of the strongest companies in the world, has to pay near 9% and MGM has to pay 14% for a loan using New York New York as collateral, I feel sorry for most corporate America.  Additionally, every week I see mortgage finance tighten and prgrams go away.

For some reason the markets think when we ‘come out of this’ everyone will open their eyes and it will be 2005 again. I think in a year or three when the global financial markets actually stabilize that most of us will not recogize it because it will be so much different than most of us have ever seen in our lifetimes. -Best, Mr Mortgage

Below is a great summary of the Verizon deal from one of my favorite new bloggers at Across the Curve:

November 3rd, 2008 3:35 pm

…10 year bond and a 30 year bond by Verizon. That very large telecom company with a reasonably pristine reputation issued 10 year notes and 30 year notes 4 7/8 percent above benchmark Treasury debt. The bonds carry 8 7/8 coupons in 10 years and 8.95 in 30 years. Each came 50 basis points to 60 basis points cheap to outstanding VZ debt.

I have asked this question before. If VZ has to pay nearly 9.00 percent to raise capital, what is the fate of a BBB industrial? I suspect they defer any attempts to raise funds. And for financials the world is so confused that for most the market is also closed.

So while the corporate market is manifesting some faint signs of improvement, a true rehabilitation is a distant prospect.

I would also offer the thought that if one can earn nearly 9.00 percent on a 10 year Verizon, why would anyone with a long term perspective charge into the equity.

Secondly, the MGM Subprime loan:

MGM MIRAGE Prices $750 Million in Senior Secured Notes

LAS VEGAS, Oct. 31 /PRNewswire-FirstCall/ — MGM MIRAGE (NYSE: MGM) announced today that it has priced a private offering of $750 million principal amount of 13% Senior Secured Notes due November 2013 at a price of 93.132%. The transaction is expected to close on November 14, 2008. The notes will rank as general senior obligations of MGM MIRAGE, will be guaranteed by substantially all of MGM MIRAGE subsidiaries, and will have a first priority security interest in the Company’s New York — New York Hotel & Casino.

Lastly, the Fed’s Senior Loan Officer Survey was released yesterday and showed severe contraction across the majority of lenders at the ‘Prime’ level. This is something that cannot be turned on a dime. The effects of this lending freeze even if banks started lending at a 2006 pace today would be felt for some time into the future:

From Mortgage News Daily – Nov 3rd, 2008

U.S. banks tightened lending standards for businesses at a record pace in the third quarter, according to the Federal Reserve’s July Senior Loan Officer Opinion Survey on Bank Lending Practices.

In the three months ending in October, a record 85% of banks tightened lending standards to businesses, up from 60% in July.

The survey showed 84.6% of firms with annual sales of $50 million or more raising standards and 14.5% indicating “considerable” tightening.

“What I fear is a sharp contraction in willingness to lend. That would suggest we’re now cutting into the muscles and bones,” said T.J. Marta, fixed income strategist at RBC Capital Markets, prior to the report’s release.

Demand was a key issue in the report with about half the banks surveyed reporting weaker demand for prime mortgages and less demand for commercial loans.

The survey showed that 70% of domestic banks raised standards for prime mortgages in the quarter after 75% reported doing the same in the previous quarter.

In the seven categories on willingness to lend and collateral requirements, none of the 55 banks surveyed reported easing standards. The top reasons for tighter standards were the uncertain economic outlook and reduced tolerance for risk.

The problems appear to be hitting the large banks hardest.

“Responses differed somewhat by bank size, with about 80 percent of the largest banks, but only 55 percent of the smaller banks, reporting tighter standards for prime borrowers,” the Fed said.

By Adam Button and edited by Sarah Sussman
�CEP News Ltd. 2008

One Response to “Real Look at the ‘Credit Market’”

  1. The casino stocks are a special case, trying to expand against an entrenched competitor in Macau and dealing with the rapid decline in Las Vegas and Atlantic City. Bad timing to say the least.

    If Verizon has to pay 9% to raise capital, should not all of us demand at least 9% before we invest?

    This is important, 9% means that the p/e ratio you should demand is 11 or lower!

    Forget Ken Fisher and his numbers, p/e of 11 or better is the MINIMUM. Verizon and AT&T will still be in business long after we are in the ground. If Verizon has to pay 9%, that is the least you should demand.

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