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Bernanke KIKs the Can

Bruce Krasting's picture




 

 

In February, when Ben Bernanke gave his report to Congress, he spoke of his concern about "Excessive risk taking". On May 10 he repeated his warning:

 

very low interest rates, if maintained for a considerable time, could impair financial stability. For example, portfolio managers dissatisfied with low returns may “reach for yield” by taking on more credit risk, duration risk, or leverage.

 

So what is Ben talking about? What does it mean when he says "reach for yield"? I think I may have found a good example of what Ben is referring to. Consider this bank financing that was completed last week:

 

Borrower: KIK Custom Products

Amounts:

1st lien = $420Mn - Priced at LIBOR plus 425bp - priced at 99.

2nd lien = $220Mn - Priced at LIBOR plus 825bp - priced at 98.

Floor pricing = Minimum LIBOR was set at 1.25% (100bp over current LIBOR rate)

Company rating = Caa/B-

Fees = Undisclosed - must have been big - 3+%

Book runner = UBS

 

KIK Custom Products makes bleach and soap. The company is owned by CI Capital Partners, a NYC based LBO outfit. There is no publicly available financial information for KIK, but the pricing/rating and the sponsor tell me that this is a highly leveraged deal. What kills me is that this is a recap deal. This financing replaces the existing debt of KIK, and therefore it is on substantially better terms than what existed before the recap.

This is a junk deal. It's not suitable for widow and orphans - but that's where this paper is going to end up. This loan will work its way into the many Loan Mutual Funds that are available to retail investors. Small investors have been pouring money into bank loan funds. Every month for the past four-years money has flown into this investment class. So far this year $20Bn has found its way to junk bank loan funds. Another $900Mn came in last week.

As an ex junk guy, I have no problems with the KIK deal - provided that this dodgy paper ends up in the hands of true 'Sophisticated Investors'. But I do have a problem with the fact that this deal could not have happened were it not for Ben Bernanke and his unending squeeze on returns for small investors.

The second lien tranche of the KIK deal has a return north of 10%. The only exit strategy for this paper is another re-cap; cash flow from operations at KIK will not pay this loan down. So this is a one-way-out deal. I think deals like this must have Bernanke looking over his shoulder. He must know that this is the perfect description of investors "reaching for yield".

Some will look at the KIK deal and conclude that this is evidence of a healthy capital market. I see it it quite the opposite. This type of financing is an accident waiting to happen. The fact is that Bernanke's money policies have long since crossed over from being something that contributes to economic health and stability, to something that is adding to systemic risks and instability. I suspect that Bernanke is well aware of this fact, so are other members at the FRB. If you're looking for evidence that Bernanke has pushed the string too far, the KIK deal is all you need to look at.

If Bernanke is honest with the facts, he would wind down QE as fast as he could. If he doesn't, then his warnings over the past few months about the risks of cheap money are just a lie. So Ben has a hard choice in front of him. Either he backs off of his reckless money policy, or his legacy goes up in smoke. The bubbles are popping up all over in 2013, I don't think that Ben wants to go down in the history books as another Fed Chairman that creates bubbles that come crashing down.

I think there is a high probability that the Fed lowers the amount of QE purchases in June. That's just a few days away. The gold and bond markets have been "saying" that QE is ending for the past few months. The equity and junk markets have largely ignored the signs. June is setting up as an interesting month.

 

Oshit

 

 

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Tue, 05/21/2013 - 15:59 | 3585218 QQQBall
QQQBall's picture

the Bernank - Most Powerful Person in the World.. Unless the North Koreans stop powering their missiles with baking soda.

Tue, 05/21/2013 - 15:32 | 3585106 QQQBall
QQQBall's picture

In the end, Bernanke only needs another 1/2 year and he can move on. When the Depression started in 2008, was anyone chasing Sir Al through the streets? No, when push comes to shove BB will jawbone just like Greenspan did while exiting stage left.

Tue, 05/21/2013 - 14:31 | 3584866 Clowns on Acid
Clowns on Acid's picture

Ahhhh Bruce, but you are thinking logically. How much $$ has anyone made with critical thinking in 2013?

Only thing for Bernank to do is to set put strike prices (binary options) on where he will decrease or increase QE.

I.E. - If ES goes to 1600 he resumes at 85B / month, if ES touches 1700 then reduce QE purchases to 50B / mth. That effectively would be the policy one could read into Dudley do wrong's blather earlier today.

Long straddles going into June, VIX is approaching zero and Bernank can't have that, so buy the vol with a straddle and play the roller coaster.

Tue, 05/21/2013 - 14:22 | 3584822 847328_3527
847328_3527's picture

Swiss get more creative:

 

 

With Christmas coming, sales of chocolate gold coins have no doubt soared as parents get ready to fill their little ones' stockings with edible treasure.

But wealthy individuals worried about what the New Year could bring are instead stocking up on gold chocolate bars.

Swiss refinery Valcambi has been selling its CombiBar to private investors in Switzerland, Austria and Germany who are worried about a return of Weimar Republic-style hyperinflation.

Read more: http://www.dailymail.co.uk/sciencetech/article-2251757/Fancy-chunk-No-chocolate--Its-future-money-euro-goes-under.html#ixzz2Tx8DwlZ8
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Tue, 05/21/2013 - 14:59 | 3584980 css1971
css1971's picture

Used to be "Pieces of eight".

http://commons.wikimedia.org/wiki/File:Speedpass_with_Pieces_of_Eight.jpg

Do the same for silver.

1 gram of gold is about $50

1 gram of silver is about $1

Tue, 05/21/2013 - 14:10 | 3584762 bobbydelgreco
bobbydelgreco's picture

ur wrong bruce he won't stop

Tue, 05/21/2013 - 13:42 | 3584632 andrewp111
andrewp111's picture

Bernanke will have to ease off since the amount of Treasury borrowing is dropping anyway, and probably won't ramp up again until near the end of the FY. But it doesn't matter. Japan is printing at max, and once the Yen drops to 120 or so, the ECB has to join the mad devaluation party.

NO EXIT

Tue, 05/21/2013 - 13:36 | 3584587 Big Ben
Big Ben's picture

One look at housing and equity prices should make it clear to anyone that we are once again in the bubble creation phase. But central bankers have a long history of ignoring bubbles, as does Bernanke himself. Bernanke should ease off on QE, but will he? I suspect we get nothing more than a change of language in June.

By the way Bruce, I like the way you used a soap maker to illustration the creation of bubbles!

Tue, 05/21/2013 - 13:27 | 3584568 YHC-FTSE
YHC-FTSE's picture

The clue is in the name surely? A "custom" soap maker nobody has heard of getting 640 million dollars? What do they do, render fat from unicorns to make their products? WTF. Even worse, it's a refinancing/debt consolidation deal. 

I can picture their hard working, gold ID bracelet wearing employees now lounging at their "social club" listening to Sinatra in the background. This deal has all the hallmarks of organised crime.

There must be a million real small businesses with cashflow problems in desperate need of a short term overdraft getting shafted by the banks who must be reading about such incredible largesse with complete disbelief. 

Bernanke may or may not squeeze his bottom to taper the shit this summer, but what he won't be doing is squeezing it shut and reaching for the tp. The shit must flow.

Tue, 05/21/2013 - 13:21 | 3584537 ebworthen
ebworthen's picture

Bernanke talks out of both sides of his mouth; one side tells the American taxpayer he cares about unemployment and inflation, the other side tells the banks, hedge funds, and other corrupt institutions that comprise Wall Street "party on gang - I've got your back."

Tue, 05/21/2013 - 12:52 | 3584452 James
James's picture

A lien is a legal filing of a lawful debt unpaid against any property deadbeat owns that can't be sold until Lien is paid.

It "Clouds" title meaning a title search readily shows this.

Tue, 05/21/2013 - 12:53 | 3584461 Fuh Querada
Fuh Querada's picture

Uhuh... Thanks
Thought it was a chinkie massage therapist

Tue, 05/21/2013 - 12:44 | 3584438 Fuh Querada
Fuh Querada's picture

What's a "lien" for cripes sake

Responses in English please

Tue, 05/21/2013 - 14:39 | 3584896 Renfield
Renfield's picture

Barack? Is that you?

Tue, 05/21/2013 - 13:49 | 3584671 Umh
Umh's picture

Click on the link below. Then read.

https://en.wikipedia.org/wiki/Lien

 

Tue, 05/21/2013 - 15:10 | 3585007 Fuh Querada
Fuh Querada's picture

I appreciate the link but it is incomprehensible for non-CFAs. I understand for example what a junk bond or a securitized mortgage is, but the type of "investment" Bruce is describing is not clear to me.

Tue, 05/21/2013 - 15:47 | 3585135 Pure Evil
Pure Evil's picture

You can sell the house because the bank will get theirs before you see any money from the sale.

But if the sale of the property did not cover the loan, you can still be held liable for any remaining monies.

Anyone can place a court ordered lien against any property you own if you owe them money.

Tue, 05/21/2013 - 15:36 | 3585105 Thisson
Thisson's picture

I understood it to be buying interests in tranches of loans, where the proceeds are used to refinance the company's existing debts at lower interest rates, with the exit strategy being another refinancing down the road.  The loans are secured by the debtor's property, with one tranch being in the first lien position and another tranch in 2nd lien position.  If the debtor doesn't pay as promised, the debtor's property remains encumbered by the lien and cannot be sold or pledged to secure additional credit without satisfying the existing debts (and thus discharging the liens). 

Simple example: you take out a HELOC loan on your house, so the bank puts a lien on your home.  You can't sell the home until you've paid off the bank and they remove the lien.  Nobody can get clear title to your home while the lien is on there, so you have to satisfy the bank and remove the lien before selling the home.

Tue, 05/21/2013 - 17:00 | 3585435 Fuh Querada
Fuh Querada's picture

all:

Those were very clear explanations - thanks ! It seems like yet another layer of complexity over a securitized mortgage.

Tue, 05/21/2013 - 12:35 | 3584414 Dollar Bill Hiccup
Dollar Bill Hiccup's picture

They only "know" about a bubble's existence ex post, after it has popped (and consequently the bubble no longer exists).

Equities are GLORIOUS! Why would anyone ask the FED to MANIPULATE this most excellent leading indicator by popping its bubble ...

Oh, hey wait, it can't be in a bubble until it's popped, hence the FED can't do anything except inflate to explosion ...

Hmmm, something troubling in this circular logic.

 

Tue, 05/21/2013 - 12:37 | 3584396 James
James's picture

Couple things if I may Bruce...........................

First I appreciate your posts. Your experience in the Markets shows.

Second, I gotta say, not being "sophisticated" as you and your peers in the markets it is surreal watching what one would think were adults play this extend and pretend game as if somehow all will be well going forward. Your reference of KIK and it's underlying fundamentals is a case in point. In my middle class, for now, world I see continuing foreclosures, layoffs, boarded up store fronts accelerating, men, women, and children sleeping in vehicles and nobody doing a damn thing about it  And , of course , the supposed new found "Least dirty shirt" value of the dollar that in reality has lost multiples of 10% in the last five years. Very, very dangerous game this system is playing. Absolutely surreal.

I currently use the Bank of Sealy for my liquid assets but my 80 yr. old mother has me do deposits and such for her. Yesterday I was @ her bank  and the teller asked me if I would like to open an account and @ that moment that womans face morphed into Jon Corzines'. I took it as an attempt to fleece me in the coming months. See link to WB7s' recent post. http://www.zerohedge.com/contributed/2013-05-15/no-bank-deposits-will-be...

Tue, 05/21/2013 - 11:43 | 3584209 moneybots
moneybots's picture

"If Bernanke is honest with the facts, he would wind down QE as fast as he could. If he doesn't, then his warnings over the past few months about the risks of cheap money are just a lie."

Greenspan warned of irrational exuberance THEN DID NOTHING.  As they say, talk is cheap.

As Chuck Prince said, we have to keep dancing while the music is playing.  It is up to Bernanke to turn off the music.  He is responsible for people dancing.

It is well past too late for warnings.  All parabolics fail.

Tue, 05/21/2013 - 11:43 | 3584207 rlouis
rlouis's picture

"If Bernanke is honest with the facts, he would wind down QE as fast as he could. If he doesn't, then his warnings over the past few months about the risks of cheap money are just a lie."

Of course it was a lie.

 

Tue, 05/21/2013 - 11:42 | 3584203 NEOSERF
NEOSERF's picture

No change until Yellen takes over...Bernanke is essentially lame duck at this point.

Tue, 05/21/2013 - 11:54 | 3584267 NotApplicable
NotApplicable's picture

Once that happens, any criticism of the Fed will be labeled sexism.

TA-fucking-DA!

Tue, 05/21/2013 - 11:41 | 3584195 jg
jg's picture

Bruce, do you really think the primary dealers of Treasury debt will continue to buy if Ben's backstop goes away, as you surmise, in June?

If the backstop does go away, I think the PDs cease or slow buying Treasuries, and we see interest rates move up sharply.

Given that Treasury is facing a deficit of $100 billion per month, Treasury cannot sanction such a rise in interest rates.

So, I think Ben's hands are tied by the greater powers of the Treasury and holders of Treasuries, and he will have to continue his QE.

Tue, 05/21/2013 - 13:49 | 3584668 andrewp111
andrewp111's picture

The debt limit will prevent any new issuance until  Aug or Sep. Right now Treasury is limited to rolling over once the limit is reached. They will borrow from TSP to kick the can.  As long as Bernanke keeps buying F/F bonds, F/F profits will still flow to Treasury. Maybe they can kick the can to October. This is the best time for the Bernank to ramp QE down, because he has no choice.

Tue, 05/21/2013 - 11:41 | 3584192 Rainman
Rainman's picture

Chairsatan only needs to hang tight for another 7 or 8 months. If I were him I'd tighten down QE a measly couple billion a month and ride the headlines that he has had the wisdom to enact an orderly unwind ...then get the hell out of Dodge fast. 

Tue, 05/21/2013 - 11:38 | 3584181 monad
monad's picture

And Its Gone! Times are hard in the money laundry.

Tue, 05/21/2013 - 11:38 | 3584180 Par Contre
Par Contre's picture

Bruce, I don't know how you manage to always come up with such unique insights, but I always enjoy reading them. I've taken a really long view on what's going on, and while it may lack your sophistication and expertise, some might find it interesting.

http://parcontre.blogspot.com

Tue, 05/21/2013 - 11:43 | 3584208 LawsofPhysics
LawsofPhysics's picture

Please, once you have been a "carny", you know how the "con" works.

Tue, 05/21/2013 - 11:53 | 3584264 NotApplicable
NotApplicable's picture

See, I told you there was value to be had.

Tue, 05/21/2013 - 11:36 | 3584170 LawsofPhysics
LawsofPhysics's picture

So after years of passing "junk paper" around and making your "stash", we should listen to what Bruce has to say?  Go fuck yourself Bruce, another paper-pusher for the guillotine...

Impress us, and lead the fucking charge for justice with your own capital asshole.

Tue, 05/21/2013 - 11:51 | 3584259 NotApplicable
NotApplicable's picture

Might I suggest decaf?

Like it or not, Bruce's perspective does provide value in a "behind the scenes" kind of way.

Tue, 05/21/2013 - 12:07 | 3584322 LawsofPhysics
LawsofPhysics's picture

That's great, blowback is still a bitch motherfucker.  hedge accordingly.

Tue, 05/21/2013 - 13:58 | 3584697 fonzannoon
fonzannoon's picture

I like Bruce a lot, but he knows he is full of crap here.

"If Bernanke is honest with the facts, he would wind down QE as fast as he could."

Bullcrap. If he was honest with facts, he never would have done it in the first place. Maybe you could make the argument for the first QE. I would not. But it could be made. But once he went to QE2 he went full retard and there was no going back.

Also this junk bond issuance is small potato's. Try the biggest insurance companies in the world loading up on shit to pay out promises made 5 years ago that they can't keep.

Tue, 05/21/2013 - 11:46 | 3584231 Panafrican Funk...
Panafrican Funktron Robot's picture

Bruce's version of "leading the charge":  clawbacks on Social Security benefits because they're "unsustainable".  Ie., spend a career fleecing the plebs, and then bitch about same plebs needing Social Security to eek out a meager existence.  I don't disagree that S.S. (and most fedgov spend) is unsustainable, but it truly is a bullshit message coming from leech like Bruce.

Tue, 05/21/2013 - 13:03 | 3584479 oddjob
oddjob's picture

What do you expect from a fiat apologist?....using austerity to pay the tab for criminal actions by banksters is morally corrupt.

Tue, 05/21/2013 - 11:35 | 3584158 moneybots
moneybots's picture

"very low interest rates, if maintained for a considerable time, could impair financial stability."

Subtract the word could.  Greenspan held rates low and created a housing bubble.  Bernanke is repeating the process.  Financial stability is already impaired.

Tue, 05/21/2013 - 11:33 | 3584148 disabledvet
disabledvet's picture

You seem to be saying the banks don't know how to do their job as well. Not disagreeing...just saying. "if equities are sailing" Mr Currency Guy I'll tell you right now...Morgan Stanley could care less. They've seen more than their fair share of clowns on Wall Street making it their mission in life to blow up the banks "and yet again discovering a Government backstop" (to the extent that the State can do that of course. That's a rather interesting thought actually.) listen...Andrew Jackson...Ben Franklin...US Grant...Woodrow Wilson...they're literally on your money for a reason. They summoned the WILL to tell the banks to go to heck. At great personal cost of course. I appreciate what the banks are trying to do here but I'm sorry...that's a war a machine I see and...obviously...I'm a vet first and foremost.

Tue, 05/21/2013 - 12:10 | 3584338 Almost Solvent
Almost Solvent's picture

Sorry, Wilson let the Federal Reserve come into existence.

A pox on his house.

Tue, 05/21/2013 - 11:41 | 3584191 LawsofPhysics
LawsofPhysics's picture

Exactly, another paper-pushing "middle-man"  crying about the mess he helped create (and proftted from).  fuck him.

Tue, 05/21/2013 - 11:28 | 3584128 the grateful un...
the grateful unemployed's picture

why would anyone, or any company pay more than the current market rate for debt? if KIK was a junk deal it is less so now, you spend less on your debt, that's gives the company more room on profit margins? i refi my house i have more money. that's good, the only problem i see if when i refi my house on mark-to-mythic valuations, and the value comes down to earth. so this is a company with very little in assets? just guessing they might bring a few jobs home from China? lower the final cost of everyday consumer products. i mean isn't this the sort of thing that helps small business, rather than the financial engineering that boosts wall street profits? (which causes asset inflation, and creates a bubble?)

Tue, 05/21/2013 - 12:39 | 3584429 sgorem
sgorem's picture

number one, IT'S a NEW YORK company, they don't really give a shit about anything like paying interest over a few months. the "loaned" money will be long gone, the "rinse and repeat" soap & bleach business(how apropo), will go "down the drain",(again, how apropo), and the "owners", after "cleaning" out the coffers(ditto), have their retirement and are living very well in south america, or israel. isn't that how it's been working for a few decades now?

Tue, 05/21/2013 - 11:50 | 3584248 NotApplicable
NotApplicable's picture

Why?

Well, we have to do something!

Tue, 05/21/2013 - 11:37 | 3584172 Almost Solvent
Almost Solvent's picture

"KIK Custom Products makes bleach and soap."

There are no underlying assets of any real value in an operation like this. Some machinery, vats, office supplies, etc. That's about it. So, when KIK goes down for any reason, the bondholders will be getting a penny or two on the dollar. This shitcan only exists to make interest payments to the bondholders. The bleach and soap are of no consequence.

Tue, 05/21/2013 - 15:54 | 3585198 Disenchanted
Disenchanted's picture

Amway 'sells' soap too...

Tue, 05/21/2013 - 12:18 | 3584360 ptoemmes
ptoemmes's picture

Soap, soap, making soap...that rings a bell so to speak, but for which one should never speak of.

Tue, 05/21/2013 - 12:07 | 3584321 rustymason
rustymason's picture

Hey, it's a perfectly legit import-export bidness!

Tue, 05/21/2013 - 11:27 | 3584125 earnyermoney
earnyermoney's picture

Hey Ben, JYF

Do NOT follow this link or you will be banned from the site!