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Michael Tennenbaum Explains Why $50 Billion In Distressed Debt Could Default In Next Two Years
Old school private equity guy-turned-hedge fund manager, Michael Tennenbaum, was on Bloomberg TV, discussing his perspectives for the distressed debt market (yes, such a thing did once exist, before HY bonds of 20x levered companies starting trading at par+). And all those who believe that courtesy of the Fed's intervention in every market there will never be another bankruptcy, let alone a bond yielding more than 10% take heart: according to Tennenbaum a full $50 billion in distressed debt may go Chapter in the next two years, although this is probably more good news for all the mini restructuring boutiques who overhired last year only to see the administration make bankruptcy illegal. The math: "Over the next five years $1.2 trillion in non investment grade debt comes due, of which $200 billion are due in the next two years, and of that a quarter or $50 billion are issued by companies rated rated B or lower. The experience that we and others have had is that this leads to default." Of course, Tennenbaum is a traditional debt-for-equity investor is more than incentivized to see this occur: he is currently sitting there doing nothing, as not only does nobody need DIPs or other rescue financings (why, when you can issue new B3/B- debt at 8%), but no company is willing to part with equity when every pitchbook it sees tells it can progressively refi current debt into paper that may eventually pay a 0.001% coupon. On the other hand, this, as well as every other contrarian outlook is predicated on the assumption that the Fed will be able to control the demolition of the US economy, which it won't. Which is why we are confident that not only will Mike be correct (eventually), but the full amount of HY paper that will default will boggle the mind when the dominoes really collapse. Until then, study learn (and earn) the Bernanke Moral Hazard Put: learn it and love it.
Many more interesting observations from Tennenbaum, but here is a sliver on why the PE legend is bearish on the economy:
The math is very bad. The consumers are 70% of the economy, they are liquidating debt. The degree of stimulus coming from federal deficit spending is flattening and maybe declining. When you see things like AIG selling shares, that's in effect reducing the government deficit. That's taking money from investors who are buying shares and paying down some advances that the government made. So there aren't much in the way of drivers for the economy in the next two years. If there is opportunity for inflation to speed up, then we could see more vigor, but in the meantime all the people who excitedly early this year had projections they are going to be able to pay their debts and get some refinancing, are now finding they don't have pricing power and the promised land is not just around the corner.
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Don't worry. The Fed's got their back.
What's another $50 billion? That's what, three weeks' worth of POMO?
Agreed! What does the Fed care?!?!
A mere $50B is only 1/20th of a trillion. Bernanke pocket change. Hell, he left $50B as a tip to Angelo Mozilo a few years back.
So lets do the math gedunken.
$11 Trillion Mortgages, $11 Trillion Treasuries, $15 Trillion GDP, $50 Trillion Equities, $615 Trillion derivatives, most of them interest rate sensitive.
And now the Federal Reserve Banks hold $800 Billion Treasuries, soon to be the largest single holder in the world.
Let's say just a small part of this Ponzi IOU scheme defaults.
Is it more likely we have debt default inflation in Spades or hyperinflation as Bernanke, Geithner and company are defenestrated, peeled, piked or sent to non-extraditable Paraguay with the Bushes and Rev Moon?
http://www.cco.net/~trufax/general/bush_family_paraguay_hideaway_up.html
PS Could this account for no small part of the decline in banks the last fortnight?
http://stockcharts.com/charts/gallery.html?s=faz
All aboard.
The train is leaving the station, and it has no bank stocks, bonds, gold or equity longs...
No sorry. Bankruptcies simply will not be allowed.
They'll keep companies afloat just like they did GM, as zombies with no future. And failing that, simply as empty shells still "servicing" those debts ... with fiat money given to the banks as QE2 and loaned to the zombie companies with no collateral and no expectation of ever having it repaid.
I'm not even being funny. That's exactly how they'll do it. Whatever it takes to keep these BKs out of the market logic and off the front pages.
Thank you for flying ******* Airlines. We know you have a choice in bankrupt airlines and appeciate you choosing us.
And after 18 months of industry consolidations, you'll have exactly two from which to choose. But that's still a choice so STFU about it unless you want a strip search for your mom. And yes we'll send a team to her house to strip search her if she's not flying today. That's the kind of customer service we're all about these days.
Drive Government Motors Lada II, created by bureaucrats everywhere.
http://www.realussr.com/ussr/soviet-automobile-industry-part-2-of-2/
Two years? Too long. Can't wait that long. Besides, that's plenty of time for the Dow to reach 36,000.
When the fed is expanding the balance sheet by trillions 50 billion is chump change. The fed can make everybody whole so no pain is felt. We now invest risk free.
Sounds like a professional "kick the can down the road" management team
deleted.
The 'new rules':
"No one is allowed to lose one cent of nominal principal as a US$ bondholder. Ever."
Did you hear that China? Japan? Saudi Arabia? Other "surplus" countries?
Oh, and lookee here. Your pal Uncle ("Shit-") Sammy has a few that are for sale...
Bunk ruptcy is what we have...
50 billion? did he say billion and not trillion? what is this Austin Powers?
Bernanke will give the banks 50 billion in a heartbeat and probably toss in an extra 20 billion to add to the goldman year end bonus pool just because he loves them
Michael Tennenbaum is old, okay? He probably still remembers when a hun'erd grand was some serious coin. Today, his own minions spend that kind of money monthly on blow and hookers.
It's not really about the 50 Billion in bonds, it's the 10x leveraged derivatives based on the debt over and above the bonds people should be talking about.
But shit, what's half a trillion anymore...US govie been spending that to prop up the market in the last couple of months.
Still can't honestly figure out why AAPL is worth more than a buck.
AAPL may go up or down in fiatsco terms. But re your comment on why it is worth a buck--do you completely doubt their accounting? Allegedly they're debt-free with zillions of dollars of cash etc.
More optimism... Arrrgh! The sunshine! I can't stand it!
Don't worry. It is estimated that the sun is due to implode in about 5 billion years,or .0216 trillion days. If we just add $1000/ day for the next 5 billion years we'll have 216 trillion. By that end time that should pay the interest on a couple of days of interest.
Such bullshit is sick. The debt will be rolled. Come on. The freaking play book is right in front of your faces
BS, not all of it... Half of this $1.2T was bank debt issued to finance the LBO boom, priced on peak multiples on peak earnings. And was bought by CLOs. When do the CLOs reinvestment periods ramp down? 2012-2014. After that, nada. HY bond issuances have come back decently, but right off the bat, half the demand is GONE. They aren't rolling out new CLOs left and right, and the loan market is quiet.
They've been kicking the can down the road for 18, 20 months and how much of that maturity overhang have they rolled? 10%, tops. Where's the rest coming from, kengland? 2013/2014, things will be very interesting...
My buddies in HY say in 2014 the HY Titanic hits the iceberg - watch your duration
I recognize that his guy could school me, but you have to take risk to get reward. And you have to make money to stay in business.
Cheap VIX is a terrific hedge.