[NYTr] Crashing Economy: PHH Deal Collapses, Increasing Market Gloom

[All the News That Doesn't Fit]

Financial Times via MSNBC - Jan 1, 2008
http://www.msnbc.msn.com/id/22465467/


PHH deal failure shows wider market gloom

By Henny Sender in New York
Financial Times

Tuesday's collapse of a $1.8bn bid from Blackstone and General Electric
for PHH, a mortgage and leasing business, is the latest indication that
the financing market for leveraged buy-outs is not going to get better
any time soon.

Indeed, with the debt of most existing deals trading at or below the
prices investors originally paid, concern about losses on the part of
both underwriters and investors is growing. Wall Street underwriters
fear they won't get rid of the paper on their books, while investors
fret that the debt they buy today might be cheaper tomorrow.

To be sure, PHH - a mortgage lender, albeit not of the subprime variety
- is part of a troubled sector. But hopes for a recovery in the market
for corporate credit in the first quarter look increasingly
unrealistic. The probability of contagion spreading from the mortgage
market looks increasingly likely.

For a while it seemed the worst was over. In October, a rush of deals
came to the market and met an enthusiastic reception from buyers with
excess cash and the expectation that interest rates were falling. Both
private equity funds and hedge funds raised money for so-called
opportunity or mezzanine funds, searching for bargains and suggesting
the gap between supply of debt and demand would narrow.

Last month, David Rubenstein, co-founder of the Carlyle private equity
group, said titans of the industry were hopeful that "as 2008
approaches, the worst of the credit crunch seems to have abated". He
cited several bright spots: most stalled deals had been resolved one
way or another, Fed intervention had alleviated some concerns and Wall
Street seemed to have taken most of its pain. It hasn't exactly worked
out that way.

"We are all grappling with the new math," says the head of debt
investments for one major private equity firm. "Nobody can predict how
it plays out. We've never seen this many high-yield loans outstanding,
this much of a backlog or this many unclosed mergers."

Today, both technical and fundamental factors continue to spook the
market. The gap between supply of debt and demand for it hasn't
narrowed as much as expected. Hedge funds that bought many buy-out
loans with money borrowed from the Wall Street underwriters can no
longer borrow as much and have scaled back as a result. Buyers of more
complicated financial instruments, such as collateralised loan
obligations, are on strike.

So far, there hasn't been panic selling from Wall Street. But that may
change. There is a chance that banks with the largest inventory of
mortgage and corporate debt may have to take further write-downs if the
firms that guaranteed that debt are themselves downgraded.

All this comes at a time when more economists predict economic growth
will slow or even reverse. That could mean less cash flow to help pay
down the massive borrowings at many companies. Private equity
executives insist that the bigger, better companies they bought in
recent years can take on more leverage. But can weaker firms in the
same industry that followed suit?

"The data [are] not as bad as the psychology," said David Bonderman,
co-founder of TPG at the same December conference. "The distress we see
is because everyone's financial model was wrong. Models are perfect
predictors of the past. But they don't do well with cataclysmic
events." 

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