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Credit market tightens on lenders

Kai Ryssdal Jul 25, 2007

Credit market tightens on lenders

Kai Ryssdal Jul 25, 2007


Kai Ryssdal:

The deal of most concern to Wall Street at the moment is the one taking Daimler Chrysler private. JP Morgan Chase and Goldman Sachs are the lead bankers on the deal. We learned today they and their counterparts aren’t going to be able to syndicate, or sell off, the loans it’s arranged for that deal — $10 billion worth. Which, no matter who you are, is a big chunk of money.

It’s also symptomatic of what some are calling a credit squeeze. Since debt is what makes the business world go ’round, we figured it might be time to find out whether that’s true or not. So we got Mike Hatley into the studio. He’s the president of Westgate Horizons Advisors. That’s a company that buys some of those loans from the big Wall Street banks. Mike, good to have you with us.

Mike Hatley: Thank you.

Ryssdal: Let’s take the news of the day that I was just talking about — the Chrysler thing. And then we roll in subprimes. We roll in private equity borrowing a whole bunch of money. And I’m going to ball it all up into one question, which is, Is there a problem in the credit market today?

Hatley: Yes, there definitely is a problem in the credit market today. There’s a definite supply overhang.

Ryssdal: What does that mean — supply overhang? It’s just money, right?

Hatley: It’s definitely money. But there are all of these loans that banks have underwritten, meaning that they’re on the hook to make these loans. They want to sell these loans because they don’t want to hold as much risk as they agreed to underwrite. And they have about $200-plus billion of loans to sell. And buyers like us are saying, “Well, we’re kinda full right now. We don’t really want to have a lot more exposure.”

Ryssdal: Well, when that happens, what do these banks do? Do they just sit there and just carry this debt and carry this debt?

Hatley: That’s exactly what’s happening right now. Case in point is the Chrysler deal at this point. There’s two separate loans for Chrysler. There’s one for the car company, Chrysler. And there’s one for the finance company, Chysler Financial. They were attempting to sell to investors $10 billion-worth of loans to Chrysler, the car company, and another $8 billion-worth of loans to the finance company. They came to the market today and said, “You know what? We’re not going to try and sell those loans anymore. The $10 billion to the car company, we’re just gonna hold them on our books and we will come back some point in the future and try to sell those loans.

Ryssdal: Reconcile these two things for me, though. We are hearing from you and from other people that there are problems in the credit market. And yet, default rates are low, deals are still getting done. Clearly, people believe there is money to be made lending money. So, which is it? What’s going on?

Hatley: Well, defaults are definitely at all-time historic lows right now. But there’s still a large supply of loans that the banks have underwritten and have agreed to make that they need to find buyers for. The buyers in the market are holding back right now and it’s going to take a while before those loans make it through the market.

Ryssdal: Your group, your company, is one of those buyers of loans, right?

Hatley: That’s right.

Ryssdal: So, what is your thought process now as you look at these banks holding onto huge amounts of debt when you decide whether take it off their hands, or not?

Hatley: Well, that’s a very good question and we’ve been very, very cautious lately in terms of agreeing to buy new loans. And that’s largely because the loans that we bought three weeks ago, there’s a secondary market where these loans trade . . .

Ryssdal: You then sell them off, right? That’s the secondary market.

Hatley: Well, well, we may sell them off or other people may sell them off. Or we can buy more in the secondary market. And the loans that we paid 100 cents on the dollar for three weeks ago are trading at 97 cents on the dollar today. And, when you see that kind of a movement, it makes you think, “Well, why should I buy another new loan right now when it’s just going to trade off in the secondary market.

Ryssdal: And 3 cents on the dollar when you’re talking about a $100 million loan is a whole lot of money.

Hatley: $3 million. It’s real money.

Ryssdal: Six months from now, if we call you up and we say, “Hey, Mike, what’s going on in the credit market?” Will we either point to this summer as the beginning of something bad, or will it just be a flash in the pan and six months from now you guys’ll back to normal?

Hatley: You know, that’s a good question and I’m not sure that we’ll be back to normal in six months, honestly. I think it could take longer to play out. The one positive fact is the economy overall is still doing pretty well. I mean, you certainly read about the housing sector as being soft. But this is a technical, supply-demand imbalance and it will work itself out. But it may not be six months. It may take a year to work itself out.

Ryssdal: Mike Hatley’s the president of Westgate Horizons Advisors here in Los Angeles. Mike, thanks for coming in.

Hatley: Thank you for having me.

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