The next shoe to drop in troubled debt markets may be the collateralized debt obligations linked to corporate credit, which are getting rocked by the failure of Lehman Brothers Holdings Inc. and other banks around the world. Investors in the $1.2 trillion CDO market are staring down losses of up to 90%,
according to Bloomberg.
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CDOs pool bonds or loans and then slice them up into new securities
with varying degrees of risk. The instruments became popular in recent
years since they provide a higher return than other investments of the
same rating.
However since the credit crunch began last year, losses
from CDOs connected to subprime lending have piled up for banks,
insurers and money managers who have taken a hit of over $660 billion
in subprime-related write-downs. Now with the economy slowing, credit
tight and major banks failing, the effects are spilling over into
corporate CDOs. - George White
See Bloomberg story
See Dealscape post on CDS regulation
Comments
Of course, CDOs are going to be a problem. Any deal that had funded debt of 3+ times EBITDA during 2005, 2006 and the first half of 2007 are candidates for foreclosure or bankruptcy.
Many banks are rejecting stock handovers from their debtors and are forcing some sort of deal (or bankruptcy). I've seen a number of senior lenders being willing to take multi-million writeoffs just to get the deal off their books (sometimes all the way to zero).
If corporate CDOs are not measured in today's credit crisis already, we're in for a world of hurt in the near future. Beyond that, there's also the staggering consumer credit card debt, auto loans and upside down truck and SUV leases...
It's only going to get worse from here.