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The Wall Street Journal – Lone Star’s Splash
Lone Star Funds’ $6.7 billion dive into mortgage-backed assets dumped by Merrill Lynch & Co. shows how ready some investors are to move into this market when the pickings are right. Last week, Lone Star closed its last wave of fund raising on two pools totaling $10 billion — finishing with $7.5 billion in Lone Star Fund VI, the Dallas private-equity firm’s biggest to date, and $2.5 billion in the Lone Star Real Estate Fund, which will co-invest with the other new fund. Within days, the firm was poised to seal its biggest deal yet. -
The Wall Street Journal – Merrill Bites Credit Bullet
John Thain’s move to clear the decks at Merrill Lynch sends a message to other financial chiefs: Those losses you have been hoping will go away? Well, they are real. Even though the financial crisis is about a year old, plenty of executives have resisted that notion. Losses sparked by the credit crunch, they rationalize, are a temporary aberration fed by the supposed excesses of marking assets to market prices. That view has led many firms to dig themselves deeper into the proverbial hole by refusing to free their balance sheets by selling hard-hit assets at a loss. The result is that many will end up taking a worse hit when they finally try to repair the damage. Now, Mr. Thain has injected some realism into the debate. While belated, the Merrill chief sold $30 billion of collateralized debt obligations — among the most toxic of complex debt products — for an average price of 22 cents on the dollar. -
The New York Times – A Deal at Merrill Puts Spotlight on Others
Less than two weeks ago, Merrill Lynch valued the toxic mortgage investments on its books at $11.1 billion. Now, it is selling those investments for $6.7 billion — and financing most of the purchase to boot. The fire sale raises a troubling question for the nation’s battered financial industry: Have other banks with similar investments overestimated their values? That question reverberated across Wall Street on Tuesday as analysts began assessing the implications of Merrill’s move to cleanse its tainted balance sheet. Executives at Citigroup, JPMorgan Chase and Bank of America began reviewing the bundles of mortgages, known as collateralized debt obligations, or C.D.O.’s, that their companies hold on their books. Those companies may have to lower their valuations, and take additional charges, if their assets are similar to those sold by Merrill. -
The Financial Times – Lex: CDOh no
As a guide to banks’ balance sheets, bad news abounds. The structure of Merrill’s sale – with Lone Star paying $6.7bn for CDOs with a gross notional value of $30.6bn – means the implied value is even lower. In putting up three-quarters of Lone Star’s funding, secured only on the assets it is shedding, Merrill gets about $1.7bn in cash, and effectively swaps $5bn of direct exposure to CDOs for credit exposure to the buyer. A fall of 25 per cent could see this risk return to Merrill, hardly a comfort when the assets have apparently dropped 40 per cent since the end of June…The fact remains, however, that banks have CDOs on their books at prices that would raise guffaws from potential buyers. Merrill’s deal is cathartic. It has moved ahead of the crowd in writing down assets, raised further funds and reduced exposure to troubled bond insurers. But repeated assurances on capitalisation will stick in the minds of long-suffering investors. One way or another, Wall Street will have to bridge the gap on valuations. Closing the credibility gulf will prove equally tough. -
MarketBeat (WSJ Blog) – Merrill’s Catch-22
In valuing a truckload of securities at 22 cents on the dollar, Merrill Lynch & Co.’s fire sale might burn some other fingers on Wall Street. The company Monday decided to offload $30.6 billion in securities to private equity firm Lone Star Funds at 22 cents on the dollar, producing a rare data point in the market place, where banking institutions, for months, have kept their own counsel on what their various toxic assets were worth. In doing so, the price may now serve as a benchmark (or even a ceiling) for the value of various other collateralized debt obligations owned by banks such as Citigroup Inc. and Barclays PLC. “This is the first large-scale CDO transaction that is not a distressed sale,” Citigroup analyst Prashant Bhatia said in a morning note. “Industry participants will likely mark super-senior CDO assets with 2006 and 2007 vintage collateral down to the 22-cent range.”
Comment Merrill’s sale of toxic securities at 22 cents on the dollar was a very important event, but for a reason that many people seemed to overlook. This news is not significant in that Merrill finally decided to move these securities off its books. Rather, the MarketBeat story above nails the issue right on the head.
One of the major themes missing throughout the credit crisis has been transparency in pricing of these exotic derivatives. Now that Merrill bit the bullet and unloaded these securities, the rest of the banks will have a difficult time arguing their CDOs are worth anything more. In essence, even if the rest of the banks decide to hold on to their toxic securities, this forces a dose of reality onto their books.
This is not to say that the credit crisis is now over, but it may be the beginning of the end. How long these final chapters last is anyone’s guess. Ultimately a bottom in the housing market will likely dictate the final siren in the credit crisis. For now, as the rest of the big banks re-evaluate their derivatives in light of the Merrill sale, we will still have to endure through more writedowns and raise more capital before all is said and done.
Also, keep in mind our comments from yesterday. While Lone Star is stated at buying Merrill’s securities at 22 cents on the dollar, after factoring in the financing being provided by Merrill, this price is actually closer to 5 cents on the dollar. This is something that the rest of the big banks will have to consider when re-evaluating their CDOs.