Marketplace Scratch Pad

The debt coming due

Scott Jagow Sep 25, 2009

It’s mind-boggling how much borrowed money is still sitting on the balance sheets of banks and other companies. All those corporate buyouts and commercial real estate deals that were financed during the boom times? A lot of those loans haven’t been repaid, and the fear is that they never will be.

The Wall Street Journal reports that companies face “$53 billion in losses on loans of at least $20 million that were financed by three or more banks:”

“These results are a disaster,” said Gerard Cassidy, a banking analyst at RBC Capital Markets. “Banks are going to be forced to build up reserves. … This will have a tangible impact on banking results” in the third quarter.

The pain is expected to be especially severe for large regional banks. Many such lenders were helping to underwrite huge loans with lax terms until mid-2007, when the credit crisis started to intensify as housing markets collapsed.

Oh, but banks are just one piece of the puzzle. More info from the Financial Times:

More than one in three dollars lent by non-bank institutions such as hedge funds, securitization vehicles and pension funds, went sour, according to the figures, compared with 11.5 per cent for US banks.

The results will increase fears that, in spite of a recovery in the shares and balance sheets of many banks, the epicentre of the crisis has moved to the hedge funds and investors that gorged on cheap credit in the run-up to the turmoil.

In its June issue, “The Deal” magazine had an article that tossed out a number 8 times bigger than the one cited above: $430 billion. The magazine said that’s the amount of leveraged loans due to mature between 2012 and 2014. This money came from the kingpins of private equity — Apollo, Bain Capital, Blackstone, KKR. They poured dump trucks full of money onto the balance sheets of companies like Clear Channel, First Data and Freescale Semiconductor to make enormous buyouts happen.

Now, with good reason, private equity is worried it won’t be getting that money back, and the market is worried what a disaster that could be.

But what’s even more distressing — has anyone learned a lesson here? We seem to be diving right back into that world of cheap debt, only now, instead of financing megadeals, the borrowed money is going into stocks and commodities as I pointed out earlier this week.

And the Deal story ended with this quote from Steve Smith, the head of leveraged finance at UBS:

“At some point the competition for deals will heat back up. People’s memories will fade. I’m highly confident that we will overcook the market again. It happens every 20 or 30 years.

“The next time it does,” he says with a laugh, “I hope I’m around to participate.”

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