Crash is Getting Ugly

The post-Hedge Fund collapse, of Bear Stearns, etc, some things like CDOs are hitting 41-cents on the dollar. Sounds like a good deal, but what if you paid the dollar, and now the thing is only worth 41 cents!!! This is why the "hesitation" is hitting the leverage buyout deals like those of Cerebrus and so on. It's the thick ketchup that is getting really "slow good".

The London Financial Times reports (July 24 2007) that the basic index of European corporations' high-yield bonds (i.e., "junk bonds," now a very large fraction of the total corporate bond market) has deteriorated by 100 points in a week, and is now close to its level when both Ford Motor and GM were downgraded to junk in May 2005. That $300 billion worth of collapsing debt caused a deep shock throughout corporate debt markets at that time; but now the debt deterioration is much more widespread, the Financial Times reported.

The index measures the cost of insuring a 10 million euro bond against default; it has leaped up from 250,000 to 350,000 euro in the past week. If it goes over 400,000, credit market experts fear a sudden slide to 500,000 and a "domino effect via forced unwinding" where everybody wants to sell their junk bonds at once. This is why so many corporate takeovers which were "done deals" have been postponed or are coming undone in the financing stages, including some of the largest takeovers by KKR, Blackstone, Cerberus, etc.

The other key index, which tracks the value of high-interest Collaterized Debt Obligations (CDOs) or mixed bonds based on mortgage loans, is falling even further. It has reached a level of 41 cents on the dollar of face value of the debt, from 97 cents only six months ago.