Credit Markets - Milken Institute...The Nature of Credit 1. Credit is what counts, not leverage. 2....
Transcript of Credit Markets - Milken Institute...The Nature of Credit 1. Credit is what counts, not leverage. 2....
David
Malpass
David
MalpassMike
Milken
Mike Milken
Steven Tananbaum
Steven Tananbaum
James Walker
James Walker
Credit MarketsCredit Markets
Stephen Nesbitt
Stephen Nesbitt
Top 10 World
Banks –
1979
Ranked by Assets (US$ Billions)
Top 10 World
Banks –
1979
Ranked by Assets (US$ Billions)
Source: Bloomberg
BankBank CountryCountry Assets Assets Credit Agricole
France
$105Bank of America
U.S.
$103Citicorp
U.S.
$103Banque
Nationale
de Paris
France
$99Deutsche Bank
Germany
$91Credit Lyonnais
France
$91Societe Generale
France
$85Dresdner Bank
Germany
$70Barclays Group
U.K.
$67Dai-Ichie
Kangyo Bank
Japan
$67
Credit Agricole
France
$105Bank of America
U.S.
$103Citicorp
U.S.
$103Banque
Nationale
de Paris
France
$99Deutsche Bank
Germany
$91Credit Lyonnais
France
$91Societe Generale
France
$85Dresdner Bank
Germany
$70Barclays Group
U.K.
$67Dai-Ichie
Kangyo Bank
Japan
$67
Top 10 World Banks –
1989
Ranked by Assets (US$ Billions)
Top 10 World Banks –
1989
Ranked by Assets (US$ Billions)
Source: Bankscope (12/31/01)
BankBank CountryCountry Total AssetsTotal Assets11 Dai-Ichi Kangyo BankDai-Ichi Kangyo Bank JapanJapan 40840822 Sumitomo BankSumitomo Bank JapanJapan 37237233 Fuji BankFuji Bank JapanJapan 36736744 Mitsubishi BankMitsubishi Bank JapanJapan 36436455 Sanwa Bank Sanwa Bank JapanJapan 35835866 Industrial Bank of JapanIndustrial Bank of Japan JapanJapan 26026077 Crédit AgricoleCrédit Agricole FranceFrance 24224288 Banque
Nationale
de ParisBanque
Nationale
de Paris FranceFrance 23123199 Tokai Bank Tokai Bank JapanJapan 230230
1010 Citigroup Citigroup USUS 227227
Top 10 World
Banks –
2008
Ranked by Assets (US$ Billions)
Top 10 World
Banks –
2008
Ranked by Assets (US$ Billions)
Source: *The Banker
(July 2008), **Bloomberg (Oct 13., 2008)
BankBank CountryCountry Total Total Assets*Assets*
Market Market Cap**Cap**
11 Royal Bank of ScotlandRoyal Bank of Scotland U.K.U.K. 3,8083,808 202022 Deutsche BankDeutsche Bank GermanyGermany 2,9752,975 262633 2.4942.494 797944 BarclaysBarclays U.K.U.K. 2,4592,459 292955 U.K.U.K. 2,3542,354 16216266
Mitsubishi UFJ Financial GrpMitsubishi UFJ Financial Grp
USAUSA2,2682,268 3737
77Crédit AgricoleCrédit Agricole FranceFrance
2,1872,187 777788 SwitzerlandSwitzerland 2,0192,019 444499 1,8171,817 7878
1010 Bank of America CorpBank of America CorpJapanJapan
1,7161,716 105105
HSBC HoldingsHSBC Holdings
UBSUBS
BNP ParibasBNP Paribas FranceFrance
CitigroupCitigroup
USAUSA
The Nature of CreditThe Nature of Credit
1.
Credit is what counts, not leverage.
2.
Most loans to real estate are not investment-grade.
3.
Interest rates are volatile and unpredictable.
4.
Rating is not credit.
5.
Sovereign debt is historically risky.
6.
Debt values underpin all capital markets
1.
Credit is what counts, not leverage.
2.
Most loans to real estate are not investment-grade.
3.
Interest rates are volatile and unpredictable.
4.
Rating is not credit.
5.
Sovereign debt is historically risky.
6.
Debt values underpin all capital markets
The Nature of CreditThe Nature of Credit
1.
Credit is what counts, not leverage.
2.
Most loans to real estate are not investment-grade.
3.
Interest rates are volatile and unpredictable.
4.
Rating is not credit.
5.
Sovereign debt is historically risky.
6.
Debt values underpin all capital markets
1.
Credit is what counts, not leverage.
2.
Most loans to real estate are not investment-grade.
3.
Interest rates are volatile and unpredictable.
4.
Rating is not credit.
5.
Sovereign debt is historically risky.
6.
Debt values underpin all capital markets
Financial instruments, properly deployed, create socially useful incentives … increasing employment and aggregate wealth.
Financial instruments, properly deployed, create socially useful incentives … increasing employment and aggregate wealth.
Leverage ratios of different financial firms
Leverage ratio, total assets/common equity –
June 2008
Leverage ratios of different financial firms
Leverage ratio, total assets/common equity –
June 2008
Sources:
Federal Deposit Insurance Corporation, Office of Federal Housing Enterprise Oversight, National Credit Union Administration, Bloomberg, Google Finance,
Milken Institute.
9.1
9.8
9.4
31.6
23.7
21.5
67.9
Credit unionsCredit unions
Commercial banksCommercial banks
Savings institutionsSavings institutions
Brokers/hedge fundsBrokers/hedge funds
Federal Home Loan BanksFederal Home Loan Banks
Fannie MaeFannie Mae
Freddie MacFreddie Mac
Sources: Freddie Mac, Fannie Mae, FDIC, Milken Institute.
Fannie Mae and Freddie Mac: Highly LeveragedFannie Mae and Freddie Mac: Highly Leveraged
60x60x 56x56x 48x48x 55x55x60x60x 58x58x 52x52x 57x57x64x64x81x81x
56x56x
167x167x
65x65x
244x244x
59x59x
00
5050
100100
150150
200200
250250
300300
Core capitalCore capital Fair valueFair value Core capitalCore capital Fair valueFair value
20052005 20062006 20072007 2008Q22008Q2
Mortgage book of business over capital measuresMortgage book of business over capital measures
Fannie MaeFannie Mae Freddie MacFreddie Mac
-393x-393x
19901990
The latest run-up of home prices
was extraordinary
The latest run-up of home prices
was extraordinary
Sources: Robert Shiller, Milken Institute (Annualized growth rate of nominal home index: 3.4%)
18901890 19001900 19101910 19201920 19301930 19401940 19501950 19601960 19701970 19801980 20002000 20102010
WWIWWI WWIIWWIIGreat
Depression
Great
Depression70’s
Boom
70’s
Boom80’s
Boom
80’s
Boom
Latest
Boom
Latest
Boom250250
200200
150150
100100
5050
Index: 2000 = 100
Long-term
trend line
Long-term
trend line
19901990
Home prices don’t go up forever
Change in home prices in 100-plus years
Home prices don’t go up forever
Change in home prices in 100-plus years
Sources: Robert Shiller, Milken Institute.
18901890 19001900 19101910 19201920 19301930 19401940 19501950 19601960 19701970 19801980 20002000 20102010
WWIWWI WWIIWWIIGreat
Depression
Great
Depression70’s
Boom
70’s
Boom80’s
Boom
80’s
BoomLatest
Boom
Latest
Boom30%30%
20%20%
10%10%
0%0%
-10%-10%
-20%-20%
First RepublicBank CorporationFirst RepublicBank Corporation
Most Texas Banks were AAA in the 1980sMost Texas Banks were AAA in the 1980s
The prices of residential estate in Houston (in real terms) declined 40% from 1983-1988.
-
OFEHO Housing Index / FRB study
The prices of residential estate in Houston (in real terms) declined 40% from 1983-1988.
-
OFEHO Housing Index / FRB study
Foreclosures in HoustonForeclosures in Houston
30,00030,000
20,00020,000
19801980
10,00010,000
1,0001,00019861986 19921992
Source: Harris County Foreclosure Listing ServiceSource: Harris County Foreclosure Listing Service
•
1970: “In the first 70 years of the 20th
century, AA-rated railroads have had more than double the default rate of single-B rated industrials.”
•
Today: Many AAA-rated mortgage portfolios will have a higher default rate than single-B rated industrials.
•
1970: “In the first 70 years of the 20th
century, AA-rated railroads have had more than double the default rate of single-B rated industrials.”
•
Today: Many AAA-rated mortgage portfolios will have a higher default rate than single-B rated industrials.
•
Microsoft•
ADP•
Exxon-Mobil•
Johnson &
Johnson
•
Microsoft•
ADP•
Exxon-Mobil•
Johnson &
Johnson
AAA-rated Industrial Companies in the U.S.AAA-rated Industrial Companies in the U.S.
AAA
16,907AA+
240AA
2,098AA-
3,414A 2,602A-
2,027BBB+
903BBB
1,371BBB-
1,359
AAA
16,907AA+
240AA
2,098AA-
3,414A 2,602A-
2,027BBB+
903BBB
1,371BBB-
1,359
BB+
238BB
313BB-
331B+
339B
330B-
1,189CCC+
293CCC
214CCC-
104CC
36C 11
BB+
238BB
313BB-
331B+
339B
330B-
1,189CCC+
293CCC
214CCC-
104CC
36C 11
Investment-Grade SecuritiesInvestment-Grade Securities Non-investment Grade SecuritiesNon-investment Grade Securities
Source: Bloomberg 11/6/08
Standard &
Poor’s Ratings
New Issues: 1/1/2000 to 9/30/2008
Standard &
Poor’s Ratings
New Issues: 1/1/2000 to 9/30/2008
2%BB-Unrated3%BBB4%A11%AA80%AAA
1%Unrated1%BBB2%A3%AA5%Junior AAA88%Senior AAA
Mortgage bondsMortgage bonds
Mortgage loansMortgage loans
High-grade structured-finance CDOHigh-grade structured-finance CDO
4%Unrated6%BBB6%A8%AA14%Junior AAA62%Senior AAA
2%Unrated3%BBB3%A4%AA27%Junior AAA60%Senior AAA
Mezzanine structured-finance CDOMezzanine structured-finance CDO CDO-SquaredCDO-Squared
Source: International Monetary Fund.
When is a AAA not a AAA?When is a AAA not a AAA?
Secondary Market Prices of Third-World Debt
Secondary Market Prices of Third-World Debt
2020
3030
4040
5050
6060
7070
8080
100100
19821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989
Cents on the dollarCents on the dollar
U.S. Lending to Third-World Countries
At Face Value
U.S. Lending to Third-World Countries
At Face Value
$700$700
$900$900
$1,100$1,100
$1,300$1,300
$1,500$1,500
19821982 19831983 19841984 19851985 19861986 19871987 19881988 19891989
$ billions$ billions
The most important year
in financial history
since World War II.
The most important year
in financial history
since World War II.
19741974
19741974•
Interest rates double in one year; highest level in recent recorded U.S. history
•
Regulation restricts lending
•
Energy prices skyrocket
•
U.S. stock market plunges 50%
•
Unemployment almost doubles
•
Interest rates double in one year; highest level in recent recorded U.S. history
•
Regulation restricts lending
•
Energy prices skyrocket
•
U.S. stock market plunges 50%
•
Unemployment almost doubles
19741974
RESULT:
Companies with the highest returns on
capital, fastest rates of growth in market share and employment, and greatest
innovation were denied access to equity and debt capital.
RESULT:
Companies with the highest returns on
capital, fastest rates of growth in market share and employment, and greatest
innovation were denied access to equity and debt capital.
19761976197519751974197419731973
11001100
10001000
900900
800800
700700
600600
500500
Index
“I’ll Never Own a Stock Again”
Dow Jones Industrial Average
“I’ll Never Own a Stock Again”
Dow Jones Industrial Average
1052 on 11 Jan. 19731052 on 11 Jan. 1973
578 on 6 Dec. 1974578 on 6 Dec. 1974
19761976197519751974197419731973
11001100
10001000
900900
800800
700700
600600
500500
Index
1052 on 11 Jan. 19731052 on 11 Jan. 1973
578 on 6 Dec. 1974578 on 6 Dec. 1974
“I’ll Never Own a Stock Again”
Dow Jones Industrial Average
“I’ll Never Own a Stock Again”
Dow Jones Industrial Average
2008 -
2009
Dow Jones Industrial Average
2008 -
2009
Dow Jones Industrial Average
Source: Datastream
4/21/09
65006500
75007500
85008500
95009500
1050010500
1150011500
1250012500
1350013500
Dec
2007
Dec
2007June
2008
June
2008Dec
2008
Dec
2008April
2009
April
2009
David Malpass
slides
For “Video Safe”
slides, all information must be inside this box.
Credit market was providing $400
billion
quarterly, now draining funds (last obs. Q4 2008)
Sources: Haver
Analytics, Encima
Global.
-1000
100200300400500600700800900
1000
1998 2000 2002 2004 2006 2008
Quarterly change, $ billions
For “Video Safe”
slides, all information must be inside this box.
Banks loans and leases shrinking
26-week change (last obs. April 1, 2009)
Sources: Haver
Analytics, Encima
Global.
-4%
-2%
0%
2%
4%
6%
8%
10%
1/1/
75
1/1/
77
1/1/
79
1/1/
81
1/1/
83
1/1/
85
1/1/
87
1/1/
89
1/1/
91
1/1/
93
1/1/
95
1/1/
97
1/1/
99
1/1/
01
1/1/
03
1/1/
05
1/1/
07
1/1/
09
26 w
eek
% c
hang
e
For “Video Safe”
slides, all information must be inside this box.
New cars loan rate 48 month
(last obs. April 16, 2009)
Sources: Haver
Analytics, WSJ, Encima
Global.
6.0
6.2
6.4
6.6
6.8
7.0
7.2
7.4
7.6
Mar-05 Sep-05 Mar-06 Sep-06 Mar-07 Sep-07 Mar-08 Sep-08 Mar-09
%
M2 13-week change,
annualized
(last obs. April 6, 2009)
Sources: Haver
Analytics, Encima
Global.
0%
5%
10%
15%
20%
25%13 week % change, AR
Which way will it break?
Jobless Claims 4 week Avg
(last obs. April 11, 2009)
Sources: Haver
Analytics, Encima
Global.
0
100
200
300
400
500
600
700
1967 1972 1977 1982 1987 1992 1997 2002 2007
Thousands, seasonally adjusted
Jim Walker slides
Securitization issuance
1%
2%
3%
4%
5%
6%
7%
0
500
1,000
1,500
2,000
2,500
3,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Tangible EquityIssu
ance
($Bn
)
RMBS ABS CDO Bank Tangible Equity (rhs)Sources: Fir Tree Partners, JPMorgan, Credit Suisse.
The “unregulated”
financial system
•
Lower consumer borrowing rates
•
“Short term”
bank profits: transaction fees and
deal spreads as Principal Issuers
•
US credit markets became most advanced and liquid globally –
art / music royalties?
•
Reduced cost of capital for issuers
Source: Fir Tree Partners.
•
Derivatives market became unregulated global “Casino”
•
Financial institutions became holders of residual risk
•
Tax and accounting code enabled growth of securitized debt
•
Rating agency and bank’s/dealer’s compensation were wrongly incented
•
Banks ”moving companies” led to poor asset quality
New corporate debt issuance
Source: Fir Tree Partners, JPMorgan.
0bp
500bp
1000bp
1500bp
2000bp
0
200
400
600
2004 2005 2006 2007 2008
Spreads (bp)
Issu
ance
($B
n)
Yearly
High Yield Leveraged Loans HY Spread (rhs)
0bp
500bp
1000bp
1500bp
2000bp
0
5
10
Jan‐09 Feb‐09 Mar‐09
Spreads (bp)
Issu
ance
($B
n)
1Q09
High Yield Leveraged Loans HY Spread (rhs)
Various risks to easing of credit markets
Source: Fir Tree Partners.
Risks?
History of U.S. debt –
public and private
Sources: Fir Tree Partners, Deutsche Bank.
150%
160%
170%
180%
190%
200%
210%
220%
230%
240%
250%
Jan‐84 Jan‐89 Jan‐94 Jan‐99 Jan‐04 Jan‐09
US Debt Outstanding as % of GDP
•
Tangible common equity
•
Steep yield curve
•
Deleveraging through asset sales
•
Debt for equity exchanges
•
Bankruptcies•
Exchange Offers•
Secondary Equity offerings
•
Savings
•
Bankruptcies
•
Debt restructuring
The cure
Source: Fir Tree Partners.
INFLATE
Corporations Consumer Banks
GoldenTree Asset Management®
Steven A. Tananbaum, CEO & Chief Investment OfficerApril 2009
PastGlobal hunt for return and regulatory changes for banks led to the Creationand Implosion of Shadow Banking Systems–
Asset Based Structures–
Prop Desk–
SIVs–
On/Off Balance Sheet–
Basis Trading Books (Imaginary P&L)
Evolution of Banking Model and Credit Markets is happening Real Time
Credit Technicals are Evident of Market Forces at Work–
Most Liquid Names are Drawing the Most Interest
PresentRebound in Credit, not broad-based–
1st
Lien vs. 2nd
Lien (Wide Spread between Jr. vs. Sr.)–
2nd
Lien vs. High Yield Bonds (Similar level of Capital Structure)–
AAA rated CLO Debt Prices (Create Bank Debt at 30-50% Discount)–
Large EBITDA Issuers of $1 billion+ vs. $100-500 million Issuers–
Other Asset Backed Structures are still Very Dislocated
Retail example
Capital Structure
EBITDA
($ mm) FCFLeverage at Create Price YTM
Smart & Final 2nd
Lien147 5.5% 4.1x 55.0 24.4%
Dollar General Sr. Notes
1,000 7.0% 4.0x 104.0 11.0%
The specific investments noted within this presentation have been included for informational purposes only to illustrate the investment process.
No assurance can be given that similar opportunities will arise
or that the performance of these investments will be typical or representative of any or all future investments associated with GoldenTree.
It should not be assumed that these investments or any investments made in the future will be profitable.
Transactions of the type described herein may involve a high degree of risk, and the value of such instruments may be highly volatile.
The above information represents GoldenTree’s internal assumptions and analysis.
Accordingly, there can be no guarantee as to the results or accuracy of the information noted above.
To that end, investors may lose their entire investment in the Fund.
Past performance is not indicative of future results.
Healthcare exampleCapital Structure
EBITDA ($ mm) FCF
Leverage at Create Price YTM
Generics International 2nd
Lien72 3.0% 5.0x 65.0 20.0%
The TriZetto Group Unsecured Notes
121 3.8% 4.0x 81.1 18.3%
Biomet, Inc. Sr. Sub. Notes
900 3.5% 6.4x 94.5 11.4%
The specific investments noted within this presentation have been included for informational purposes only to illustrate the investment process.
No assurance can be given that similar opportunities will arise
or that the performance of these investments will be typical or representative of any or all future investments associated with GoldenTree.
It should not be assumed that these investments or any investments made in the future will be profitable.
Transactions of the type described herein may involve a high degree of risk, and the value of such instruments may be highly volatile.
The above information represents GoldenTree’s internal assumptions and analysis.
Accordingly, there can be no guarantee as to the results or accuracy of the information noted above.
To that end, investors may lose their entire investment in the Fund.
Past performance is not indicative of future results.