Monday, November 24, 2008

Loans are cheap; why isn't anyone buying them?

The Economist reports that ever since Secretary Paulson decided that it was a bad idea for the Treasury to buy bad loans at high prices, demand for loans has fallen, and this has lead to a fall in the price for loans.

DISTRESSED markets tend not to react well to offers of salvation being abruptly withdrawn. Holders of toxic mortgage-backed securities had pinned their hopes on the American government’s plan to buy large piles of the stuff through auctions as part of the Troubled Asset Relief Programme (TARP). The decision on November 12th to abandon that approach in favour of direct capital injections has left them shattered. The ABX index, which is linked to residential mortgages, is plumbing new depths. Spreads on the CMBX index, which is tied to securities backed by loans for offices, shopping malls and so on, have been exploding (see chart).
John Mauldin suggests that there artificial restraints may be preventing funds from buying these cheap loans:
Today, many highly rated loans are selling for 80 cents on the dollar. There is nothing wrong with the collateral or the corporation which owes the money; there is just no one with ready cash to buy the loans. I asked my friend why he doesn't buy them, since they offer very good returns.

The problem is that his fund, and most other CLOs, have covenants in their offering documents that prevent them from buying debt at less than 85 cents on the dollar. That covenant is a good thing in normal markets, as it prevents possible mischief by the manager, but right now it means that a lot of opportunity is being missed.

2 comments:

  1. For the average person finding a loan is a myriad of paperwork and a lot of legal jargon that is not easily understood. If you are in debt and need a loan to get your finances straightened out, you should check out cheap loans. They are available if you know where to look.

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  2. I don’t believe loans can ever be good for anyone, as it is just putting unnecessary pressure on us and takes us away from getting anywhere near success. I do trading without taking loan, but still I don’t need to invest and that’s due to OctaFX broker’s lovely Southampton Supreme demo contest which is just 90 minutes contest with prizes above 1000 USD, so it’s very special to have such bonuses to work with in order to get comfort in any business.

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