September 21, 2021

Borrowing Costs Fall for Italy and Spain in Debt Auctions

In Madrid, the Treasury said it sold €10 billion, or $12.7 billion, of bonds in total — twice the targeted amount — with yields falling about 1 full percentage point from previous auctions.

The Italian Treasury allotted all of the €8.5 billion of the 12-month bills it had targeted for sale, with its yields falling by half or more.

Both Spain and Italy are under intense pressure from investors because of their public finances, with recently installed governments scrambling to push through additional austerity packages to rein in deficits and debt levels.

The European Central Bank’s decision last month to aid struggling euro zone banks with longer-term refinancing operations has taken some of the heat off in recent weeks.

The E.C.B. is providing unlimited three-year credit on easy terms to banks, against a wide range of collateral. That has helped to reduce stress in the credit markets, and some say, could ease the so-called “refinancing hump” that euro zone governments face this year, under which they must roll over hundreds of billions of euros of maturing debt.

Harvinder Sian, a bond strategist at Royal Bank of Scotland in London, said the Spanish sale “went very well” and should cover about one-tenth of Spain’s borrowing needs for 2012.

Considering that the initial target of €5 billion was already a significant amount, he said, the fact of a €10 billion total issue “is almost unprecedented, to my mind.” Still, he said, there is a question about how much to read into the results, as “it’s hard not to see it as being a bit stage-managed.”

The solid showing by both countries on Thursday pushed down yields for 10-year bonds on secondary markets, although they remained at levels considered unsustainable by analysts in the medium and longer term.

The yield on Spanish 10-year bonds dropped to 5.1 percent, while Italy’s slid to 6.5 percent. German Bunds, the euro zone benchmark, were relatively unchanged at 1.8 percent.

In the auction Thursday in Madrid, the three-year bonds, which accounted for €4.3 billion, were sold at an average yield of 3.75 percent, compared with 4.87 percent at the previous auction of such bonds in July. Another €4.3 billion of a new three-year bond sold at a yield of 3.38 percent.

The Spanish Treasury also sold €3.2 billion worth of a bond maturing Oct. 31, 2016 for 3.91 percent, compared with 4.85 percent last November.

The 12-month bills sold by the Italian government were priced to yield 2.79 percent — down sharply from the 5.95 percent it paid to sell similar securities on Dec. 12.

Italy also sold €3.5 billion of three-month bills priced to yield 1.64 percent, down from 3.25 percent at the last auction.

Italy was hoping to sell another €4.75 billion of debt Friday.

David Jolly reported from Paris.

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DealBook: On Wall St., Renewed Optimism for Deals

A Kinder Morgan pipeline in Concord, Calif.Kinder Morgan, via European Pressphoto Agency A Kinder Morgan pipeline in Concord, Calif. Kinder’s $36.2 billion deal for the El Paso Corporation was one of the largest in 2011.

Before Europe’s debt crisis flared anew last summer, rattling markets and choking off a revival in mergers and acquisitions, huge corporate cash piles and cheap debt had fostered hopes that deal-making would recover strongly last year.

Graphic Graphic (Click to enlarge).

In the first half of 2011, the dollar volume of announced mergers worldwide neared its highest levels since the financial crisis. But that momentum proved fragile as deal volume tumbled 19 percent, to about $1.1 trillion, in the second half of 2011, compared with the same period the year before, according to Thomson Reuters data.

Now, with stock and credit markets steadier, deal makers are growing confident that 2012 will be better for business. Not only do they point to cheap financing and the large amounts of cash on corporate balance sheets, but they say that companies that have already cut costs may decide that they need to make acquisitions to drive growth in the face of a tepid economy.

“The dialogue has gotten back on track,” said Steven Baronoff, chairman of global mergers and acquisitions at Bank of America Merrill Lynch. “If Europe doesn’t go off the rails, you’ll see a return to long-term positive factors.”

According to a recent study by Ernst Young, 36 percent of companies plan to pursue an acquisition this year.

“We’re optimistic that the need and desire for growth will overcome the volatility headwinds, but that’s where the battle will be waged,” said Jim Woolery, J. P. Morgan’s co-head of North America mergers and acquisitions.

And there is pent-up demand among buyout shops. After a long stretch of tempered activity, many private equity firms are still feeling the pressure to deploy capital or engineer exits.

Still, companies that explore potential deals will most likely tread cautiously. For one, it remains unclear whether European leaders have done enough to ensure that the financial system remains stable on the Continent. And in the United States, 2012 is a presidential election year. With the White House at stake, companies in businesses like finance and health care may not pursue transactions until the outlook for regulation in those industries is clearer.

Many bankers expect to see notable deal activity in energy, industrials, retail, health care and technology. The energy and health care industries produced some of the largest transactions of 2011, like Express Scripts’ $34.3 billion purchase of Medco Health Solutions, Duke Energy’s $25.9 billion takeover of Progress Energy and Kinder Morgan’s $36.2 billion deal for the El Paso Corporation.

The outlook for mergers and acquisitions worldwide varies sharply by region, bankers say. The Americas, where deal volume rose 14.7 percent in 2011, will remain a bright spot, according to Mr. Baronoff of Bank of America Merrill Lynch.

Opinion is more divided over Europe, however. While economic and market woes will lead to some bargains and opportunities, deal-making may still be largely stifled by the persistent sovereign debt crisis.

“Europe is still a mess,” said David A. DeNunzio, vice chairman of Credit Suisse’s mergers and acquisitions group. “People thought there would be more divestiture activity as companies try to get more liquid, but that hasn’t happened yet.”

The disparities among regional economies is expected to fuel more cross-border transactions in 2012. While it is not a new trend for United States businesses to seek growth in emerging markets, bankers are starting to see a reverse in deal flow. After a string of strong quarters, cash-rich corporations in markets like Brazil and China are now bargain-hunting for established brands in developed markets.

“We weren’t having these conversations even three years ago,” said Mr. DeNunzio, who expects an increase of 10 to 15 percent in cross-border transactions.

“Many companies in China and Brazil see this as a once-in-a-lifetime opportunity to acquire world-scale brands at pretty attractive prices,” he said.

At the same time, companies are paying more attention to potential regulatory hurdles, whether their transaction plans are cross-border or domestic. The biggest setback in mergers and acquisitions of 2011 was ATT’s aborted $39 billion purchase of T-Mobile USA from Deutsche Telekom, which met opposition from the Obama administration.

A deal announced early in 2011, the merger of NYSE Euronext and Deutsche Börse, remains in regulatory limbo as European authorities seek additional concessions.

Though signs point to a stronger mergers and acquisitions market, there is at least one class of deals not ready for a comeback: the highly leveraged buyout.

In 2011, the private equity titans pursued more modest-size transactions, compared with the go-go years of 2005 to 2007.

Blackstone’s largest acquisition last year was the software maker Emdeon for $3 billion. Kohlberg Kravis Roberts’s biggest deal was even smaller, a $2.4 billion buyout of Capsugel. According to deal makers, buyout shops are still shopping, but banks are less willing to finance huge leveraged buyouts and boardrooms are hesitant to take on the risk. In the aftermath of the financial crisis, boardrooms are still worried that their companies will be left in the lurch if another Lehmanesque event happens.

“Boards used to say, ‘Yeah, go to lunch with L.B.O. firms when they call.’ Now they say, ‘No, you don’t have to do that,’ ” Mr. DeNunzio of Credit Suisse said. “Corporate directors have long memories.”

In 2011, the number of private equity deals announced was roughly flat, but the dollar volume fell 19 percent to $138.1 billion, according to a December report by Ernst Young.

“And as much as we and our brethren walk with a lot of swagger, the reality is, these institutions and their risk managers need to shed risk-weighted assets, and that makes these types of transactions more difficult,” Mr. DeNunzio said.

Nevertheless, deal makers have been encouraged by the evidence that investors look favorably on mergers and acquisitions as a growth strategy.

In the first six months of 2011, several acquirers recorded healthy gains in their stock prices on the day that deals were announced.

Notably, even Valeant Pharmaceuticals — which began a $5.7 billion hostile bid for the drug maker Cephalon in March — soared 10 percent on its announcement, a rare feat for a hostile buyer.

Over all, the global volume of mergers and acquisitions rose 7.6 percent last year, to $2.54 trillion, from 2010, according to Thomson Reuters.

“We have fragile momentum,” J. P. Morgan’s Mr. Woolery said. “We believe the market will reward prudent acquisitions; the market wants this capital deployed to achieve growth.”

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Economix Blog: Median Payments for Mortgages and Rent Converge



Dollars to doughnuts.

For years my colleague David Leonhardt has been helping people calculate whether it makes more sense to rent or buy a home, based on the relative costs of each decision. This week, the economists at Capital Economics noticed an interesting phenomenon related to this tradeoff. For the first time in three decades, the median monthly mortgage payment is about the same as the median rental payment:

Source: Capital Economics, Thomson Reuters

Of course, this chart is a little bit misleading because it excludes many of the upfront expenses of buying a home, like a down payment and closing costs. Perhaps more important, not everyone has the option to buy.

Credit conditions are still significantly tighter than they were a few years ago, despite the Federal Reserve’s efforts to loosen credit markets. Many lenders now require a credit score of 700 as opposed to 650, the previous standard. Capital Economics estimates that that requirement alone has shut 13 million households out of the mortgage market.

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Fair Game: As Europe’s Crisis Grows, Over There Is Over Here

Some of these banks are growing desperate for dollars. Fearing the worst, investors are pulling back, refusing to roll over the banks’ commercial paper, those short-term i.o.u.’s that are the lifeblood of commerce. Others are refusing to renew certificates of deposit. European banks need this money, in dollars, to extend loans to American companies and to pay their own debts.

Worries over the banks’ exposure to shaky European government debt have unsettled markets over there — shares of big French banks have taken a beating — but it is unclear how much this mess will hurt the economy back here. American stock markets, at least, seem a bit blasé about it all: the Standard Poor’s 500-stock index rose 5.3 percent last week.

But stock investors have a bad habit of dismissing problems in the credit markets until it is too late. Back in the summer of 2007, the stock market was roaring, despite obvious problems in the mortgage market.

Make no mistake: the troubles of Europe and its debt-weakened banks will imperil the United States. For many, it is no longer a question of whether but when Greece will default on its government debt. How far the sovereign debt crisis might spiral, and its precise ramifications, are unknowable, but some fault lines are evident.

Carl B. Weinberg, chief economist at High Frequency Economics in Valhalla, N.Y., outlined what he sees as the major risks — and they fall into two categories. One is the potential for losses incurred by financial institutions that wrote credit insurance on European government debt and the European banks that own so much of that paper. The other is the likely economic hit as banks in the euro zone curb lending significantly.

A crucial mechanism linking financial players in the United States to the problems in Europe involves credit default swaps, those insurance-like products that did so much damage during the 2008 financial crisis. (Think American International Group.)

Billions of dollars in swaps have been written on sovereign debt, guaranteeing that those who bought the insurance will be paid if Greece or other countries default. As of Sept. 9, some $32 billion in net credit insurance exposure was outstanding on debt of Greece, Portugal, Ireland and Spain, according to Markit, a financial data provider. An additional $23.6 billion has been written on Italy’s debt. Billions more in credit insurance have also been written on European banks, many of which hold huge positions in troubled sovereign obligations.

But since these instruments trade in secret, investors don’t know who would be on the hook — as A.I.G. was in its ill-fated mortgage insurance — should a government default or a bank fail.

“If Greece folds its tent and that takes out a big institution, we don’t know who wrote the swaps,” Mr. Weinberg said. “Can they raise the cash to perform on their obligations? Can they take the balance-sheet hits? We have a lot of unknown unknowns.”

Even after what we went through with A.I.G., the huge market in credit default swaps remains unregulated and still operates in the shadows. You can thank big banks that trade these instruments — and their lobbyists — for that.

As for the broader economic effects of Europe’s woes, Mr. Weinberg expects credit around the world to become even scarcer. “Outside the U.S., we never really resumed credit growth since 2009,” he said. “Another hit now would bring credit down and impose a huge squeeze on small businesses throughout Europe and over here also.”

ONE troubling aspect of the euro zone crisis is just how large the European banks’ sovereign debt holdings are. At many institutions, the positions dwarf what American institutions held in mortgage-related securities, for example, when compared to book values.

Why? Regulators encouraged European banks to hold huge amounts of European government debt by letting them account for these investments as if they posed zero risk. That meant the banks didn’t need to set aside a single euro in capital against those holdings.

Now, according to an analysis by Autonomous Research, 43 large European banks hold debt in troubled sovereigns that is equal to 63 percent of those institutions’ book values.

Adding to the peril is that these banks are funded primarily by short-term investors, like buyers of commercial paper, rather than by depositors, as is more often the case with American banks. This was the same problem faced by Bear Stearns and Lehman Brothers, which collapsed after short-term lenders fled in panic.

Measuring the loans made to European banks against their deposits tells the story. Across Europe, according to Autonomous Research, loans to banks exceed their deposits by 6 percent. Among French banks, loans exceed deposits by 19 percent. In Greece, they swamp deposits by 32 percent.

In the United States, by contrast, banks are borrowing less than 90 percent of their deposits, on average.

This is why it is becoming such a problem for European banks that so many short-term lenders are declining to renew when loans come due. Money market funds, traditionally big investors in short-term paper issued by European banks, have been reducing exposures. A recent Fitch Ratings report shows that for the two months ended July 31, the 10 largest United States prime money market funds pared their holdings in European banks by 20.4 percent, in dollar terms. In the same period, the funds cut their exposure to Italian and Spanish banks by 97 percent.

But these money funds, with total assets of $658 billion, held $309 billion in debt obligations issued by European banks. That’s equivalent to 47 percent of these funds’ total assets.

“We’re seeing a lot of the same things in the markets that we saw in the Lehman era,” Mr. Weinberg said, referring to that awful episode three years ago. “I can’t tell you specifically and exactly how the fallout from Europe will pass through to us, but I certainly can’t tell you it won’t.”

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Goldman Took Biggest Loan in Federal Reserve Program

The Goldman Sachs unit borrowed $15 billion from the Federal Reserve on Dec. 9, 2008, the Fed said in data released on Wednesday. The Fed made 28-day loans from March 7, 2008, to Dec. 30, 2008, as part of an $80 billion initiative, the central bank said. The information was released in response to a Freedom of Information Act request by Bloomberg News.

The central bank resisted previous requests for more than two years and released information in March on its oldest loan facility, the discount window, only after the Supreme Court ruled it must release the data. When Congress mandated the December 2010 release of other data on the Fed’s unprecedented $3.5 trillion response to the 2007-9 collapse in credit markets, information about its so-called single-tranche open-market operations was not included.

Units of 19 banks received the loans, which were all repaid in full, according to the Fed. The units are known as primary dealers, which are designated to trade government securities directly with the New York Fed.

Lehman Brothers had two loans totaling $2 billion outstanding when its parent investment bank filed the biggest bankruptcy in American history on Sept. 15, 2008, the data show. Those loans were repaid on Oct. 8, 2008, the report said. Lehman’s peak borrowings from the program reached $18 billion on June 25, 2008, according to the data.

RBS Securities, a unit of a British bank, had $31.5 billion in loans outstanding on Oct. 8, 2008, and UBS Securities, part of Switzerland’s biggest bank, borrowed as much as $20.5 billion on Nov. 26, 2008, the Fed said.

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Conversations: Small-Business Credit Markets, Assessed by a Loan Broker

He formed MultiFunding, a broker that helps arrange loans for small businesses. It was hardly an auspicious time to open any business, but Mr. Kassar’s challenge was particularly daunting: the freeze in small commercial loans was only beginning to thaw. Plus, business loan brokering has been a fairly obscure and even somewhat shadowy field — but one that Mr. Kassar says he believes serves a growing need.

Running both a start-up and a loan broker, Mr. Kassar has had an unusual perspective on the small-business credit crisis. Based near Philadelphia, MultiFunding, which observed its first anniversary last week, now employs four people full time and has completed 12 transactions. It is presently helping 120 clients in 23 states secure financing.

Mr. Kassar, who works with companies that seek at least $250,000, said that he was able to help from one-third to one-half of his prospective clients. When MultiFunding procures financing, it takes as a fee either a percentage of the financed loan — from 1 to 2.5 percent — or, in the case of a refinancing, two months’ worth of saving over the original debt service.

Mr. Kassar recently spoke about his business and the market for small-business lending. This is a condensed version of that conversation.

Q. What accounts for MultiFunding’s growth — marketing, or a worsening economic environment for businesses?

A. I think there’s a yearning and crying out for transparency and knowledge and understanding. Most small-business owners are more tradesmen than they are businessmen, and they don’t really understand the finances.

Q. What don’t they understand?

A. I think people have a hard time with the whole collateral concept. Also, when you get into a loan, it’s extremely important to know what it’s going to take to get out of it if you choose to get out of it early. A few weeks ago, we were refinancing a loan and the prepayment penalty the bank was trying to charge the client was 19.5 percent of the face value of the loan. The guy didn’t even realize he had a prepayment penalty.

Q. I would guess that 15 years ago not many small businesses went to intermediaries to help them find loans. Why do businesses come to you?

A. Banks push the products or services that they have to offer. In today’s world, a bank’s portfolio of options represent maybe five or 10 of the options available to the customer. And in all the confusion out there with all these different structures and options, I think it’s very difficult for the average small-business owner to figure out what is going on. We have lending products in our portfolio that are as low as 4 percent annual interest to as high as 60 percent annual interest. The goal is to get them the cheapest possible loan that we think we can get them.

Q. Is a 60 percent loan ever good for a business?

A. I am not a fan of 60 percent loans, but if you need money to fulfill a purchase order or buy some inventory, and you have no other collateral to work with. … Sixty percent a year is 5 percent a month, and if you borrow that money for two months at 10 percent and you make 30 percent on it, you’re still better off than you were without it. I would rather that they be aware of the choice and then they can make the decision for themselves. I don’t always agree with the decisions my clients make.

But we try to bring some innovative and creative thinking. There’s a client who is currently backed up on payroll taxes with the I.R.S. and their business has dropped by about a half this year, but they have plenty of collateral. We are putting them into a factoring arrangement so he can pay off the I.R.S. quickly, and then flip him into an S.B.A. loan where he can pay off the other debts.

Q. Are there people who should get loans that you can’t get bank loans for at this point?

A. I think the people who aren’t getting loans today are appropriately not getting loans.

Q. What disqualifies people right now?

A. Collateral. The value of their houses has collapsed, or the value of their equipment or commercial properties has collapsed. This most likely disqualifies people from S.B.A. loans or traditional commercial mortgages and drags them into factoring or asset-based lending or private money. That’s about half of our fundable clients. No one is addressing that.

Q. What could be done?

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