Credit crisis rears its ugly head again, straining long-term loans
December 19, 2008
Just when investors and companies thought the credit crunch was behind them, it's starting to torture them all over again.
While the government's efforts to ease the credit crunch last month soothed some corners of the debt markets for short-term loans between banks and big companies, new signs of strain intensified Thursday for longer-term loans. Worries the recession will make it harder for companies to repay loans are constricting credit in a brutal replay of last month's panic.
"There's been no improvement whatsoever in longer-term credit markets," says Michael Darda of MKM Partners.
The major setback by the credit markets is fed by and feeds the rampant despair in the stock market. The Dow Jones industrial average cratered 445 points, or 5.6%, to set a new bear market low of 7552, in part as investors lose faith in the health of the financial system.
The ugly head of the credit crunch reared in several areas, including:
•Financial companies. Credit Derivatives Research's CDR counterparty risk index, which rises as bond investors get more nervous about the health of financial firms, jumped 6.0% to levels not seen since the credit crisis was at its most intense point more than a month ago.
Debt of financial firms is under intense pressure since the Treasury's announcement it was changing the goal of its plan and would simply inject capital into the system and not buy troubled assets, says Robert Gahagan of American Century. That means banks are left with the problem of having to get rid of the assets.
•Debt with less-than-stellar credit ratings. Bonds of companies with the lowest credit ratings are now yielding 19.5 percentage points over government securities with similar maturities. That's staggering if you consider just 10 percentage points over government securities is considered a period of great stress.
Investors keep ratcheting up estimates of how bad the economy is, and each time they do, they retrench, says Jane Caron of Dwight Asset Management. Buyers are fearful bond values will only sink further. "People are hesitant to buy bonds, even though yields are mindboggling," she says.
•Commercial real estate. Treasury's decision to not buy troubled assets also triggered a collapse in the value of mortgages backed by commercial real estate, says David Brownlee of Sentinel Investments. Distressed assets selling for 70 cents on the dollar a week ago are now fetching 20 cents less than that, he says.
Even companies with the highest debt ratings are feeling the pain. The cost to insure an investor against the risk of default by companies with the highest credit ratings is at a record, says Dave Klein of CDR Credit Indexes.
Short of government debt or mortgages backed by the government, investors aren't willing to lend, Brownlee says. A flight to safety in government debt pushed yields on two-, five- and 10-year notes and 30-year bonds to record lows, Bloomberg News says. The yield on the 30-year bond fell from 3.91% to 3.46%. "Typically, bonds are mathematically based and don't have these periods of extreme fear," Caron says. "It's a difficult environment now."
Source: http://www.usatoday.com/money/markets/