Newspaper article The Evening Standard (London, England)

Normal? It's More like a Cliff-Hanger; ANTHONY HILTON

Newspaper article The Evening Standard (London, England)

Normal? It's More like a Cliff-Hanger; ANTHONY HILTON

Article excerpt


SOMEONE said this week that conditions in the credit markets werereturning to normal. Well, if this is normal, I would not want to be around ona bad day.

Take private equity. The best calculations say $350 billion ([pounds sterling]174 billion) ofloan debt has been underwritten by investment banks for deals the industry hasdone and which they have been unable to pass on. Onethird of this, in roundnumbers, is down to KKR dealsAlliance Boots, TXU and First Dataand yet the firm is still maintaining the fiction that it is on course to gopublic.

That is not the real story though.

The informed guesses as to what this debt is worth put it in a range of 92p to95p in the pound or cents in the dollar. Being generous and taking the highernumber, that means the loss on the total debt package is 5%, which amounts incash terms to a loss to the underwriters of $17.5 billionwhich they have yet to recognise and absorb officially on their balance sheet.

Remember that is the generous figureit could be, especially if the economy begins to slow, that the clearing priceis lower and the loss higher. That debt is a huge millstone round the necks ofthe investment banks.

Remember, too, that it will not be evenly spread. Another of the cheerful sumsdoing the rounds is that if the debt held by one particular investment bank waswritten down by just 10%, it would wipe out the entire year's global profitsacross all activities for that investment bank. They are, as one of theexecutives said to me the other day, "having to scrape a bit for their money"in the interbank market. No bonuses there thenand think what that will do to the London economy.

Mind you, the debt they are stuck with might cost them less than some of thestuff they have recently sold.

Across Europe, indeed across the world, there are end-investors waking up tothe fact that the value of the exotic products they have bought has plunged.

In the great unravelling, it is not behaving as the investment bankers said itwould when they sold it to them in the heady days of last summer.

So the institutions are reaching for their lawyers and moving to sue theissuing banks. Claims of [pounds sterling]100 million upwards are stacking up like tins ofbeans in Tesco. The doors are opening on a litigation nightmare.

Meanwhile, the commercial banksthe likes of HBOS and RBSwho have been cheerleaders of the private-equity boom have just stoppedlending. One private-equity house put together a e1 billion ([pounds sterling]700 million) deallast week but had to negotiate with 15 different banks to get each to take atranche of debt to get it doneand imagine the fun the banks had negotiating that.

The house reckons it has no chance of getting a e5 billion deal away for six tonine months. …

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