LBO Multiples: The Latest Credit Bubble 2.0 Record

Tyler Durden's picture

This week marked what we suspect will become an important inflection point when the world looks back at this debacle of a bubble. The Fed, having already warned in January of 'froth' in credit markets (and ths the fuel for 'hope' in stocks) proposed tougher underwriting standards for leveraged loans. Credit markets have underperformed since; but as Diapason Commodities' Sean Corrigan notes, the baleful impact of the central banks is still everywhere to be seen in the credit markets. From junk issuance to the rapid regrowth of the CDO business to the 'record' high multiples now being exchanged for LBOs; Central Banker's monomaniacal fixation on zero interest rates and artificial bond pricing is setting us up for the next, great disaster of misallocated capital and malinvested resources.


Any 'popping' of the credit bubble will be massively destructive to stocks - as we warned here, this is Carl iCahn's worst nightmare...

...But we have seen this "credit cycle end, equities ramp" before - in 2007 - where leverage (both firm-wise (debt/EBITDA) and instrument-wise (CDOs)) provided the extra oomph to send stocks higher on the back of credit fueled extrapolation of earnings trends.

(charts: Barclays)

In the end we know this is unsustainable - the question is when (in 2007 it last 10 months or so...).

We already see 30Y Apple bonds trading at 5% yields - admittedly low still but notably higher than when they issued previously. The Verizon deal recently now trades at around 5.7% yield and is considerably worse financially pro forma. Of course, just as in 2007, things change very quickly once collateral chains start to shrink.

Perhaps this is why Carl iCahn said the Apple CFO/CEO shunned him - iCahn's worst nightmare is simply the inability to proxy-LBO each and every firm...

Given these charts - which market do you think is in a bubble - equity or credit? Bear in mind that the Fed's Jeremy Stein has already made his case that the latter is a bubble for sure... and the fragility that reaching for yield creates...


But the signs of an even bigger bubble are clear...

Via Sean Corrigan of Diapason Commodities:

The Taper fiasco may have delivered a temporary fright, but this has not yet been sufficient to bring about a more lasting reappraisal. With junk yields having retraced half their 180bps spike ? and so reaching territory only ever undercut at the very height of the wild enthusiasm of the first half of this year—and with the CDX index pretty much back to its post?Crisis best, it can only be a matter of time before issuance volumes swell once more.

Even with the last few months’ abatement, this has hardly been a market in dearth, as you can see from a sampling of the comments made by Thomson Reuters in its review of the third quarter:?

The volume of global high yield corporate debt reached US$350.2 billion during the first nine months of 2013, a 27% increase compared to the first nine months of 2012 and the strongest first three quarters for high yield debt activity since records began in 1980... Issuance from European issuers more than doubled compared to the same time last year.


Nor was the gold rush restricted to bonds, per se:?

Overall Syndicated lending in the Americas… increased 34.9% from the same period in 2012, with proceeds reaching US$1.8 trillion… Leveraged lending in the United States increased markedly from the first nine months of 2012, totalling US$894.8 billion... representing an 81.5% increase in proceeds.

And, to add to the thrills—They?y?y’r?r?e Back! Yes, CDOs and CLOs are enjoying a renewed vogue just five short years after they played a key role in blowing up the world’s financial system:?

Global asset?backed securities totalled US$251.3 billion during the first nine months of 2013, a 7% increase compared to the same time last year and the best annual start for global ABS since 2007. Collateralized debt and loan obligations totalled US$62.3 billion during the first nine months, more than double issuance during the first nine months of 2012. CDO and CLO volume accounted for one quarter of ABS [volume].


As the good folks at PitchBook also pointed out, this was no time to be sitting on the sidelines in the LBO world, either:?

Corporations’ appetite to utilize cheap debt manifested itself in an average leverage ratio of 61.8%... a postfinancial?crisis high (2007 was 67.6%). Another important development has been the rapid increase in valuation?to?EBITDA multiples for buyout deals, which hit a decade high of 10.7x in 2013.


In a summation which perfectly encapsulates how the CBs’ monomaniacal fixation on zero interest rates and artificial bond pricing is setting us up for the next, great disaster of misallocated capital and malinvested resources, one Margaret Shanley, a principal at Cohn?Reznick, opined that:?

“ is no surprise that valuations have remained at robust levels this year, several factors are at play supporting the increase—high demand and low supply for quality deals and easy access to debt with historically low pricing...”

? the first two features being a direct consequence of a set of policies expressly fashioned to bring about the last one cited, one hastens to add.



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Yen Cross's picture

 Remember when Carl Icon was in bed with Lee Iacocca on that 80's Chrysler deal?


CunnyFunt's picture

He has a thing for heavily-indebted pieces of shit.


Yen Cross's picture

 +1 Cunny. I wasn't picking on the person specifically. I was picking on the dog that carries the fleas.

 Pieces of shit just never seem to get burried deep enough. Have a look at this chart.

 File:Federal Debt Held by the Public 1790-2013.png - Wikipedia, the free encyclopedia

  Scumbag sociopaths will always be scumbag sociopaths. Carl Icon was a bottom feeder in the 80's. Now he's just a mainstream(soon to be) octogenarian pussy!

  Thanks to the worthless wasteland of federal reserve policies...

CunnyFunt's picture

It's a great pity, YC.

I'd support the politically-incorrect reincarnation of Andrew Jackson any day.

Yen Cross's picture

  Thanks for the tube Cunny. I'll catch it after dinner.


El Vaquero's picture

It looks like Citibank is going to be issuing more credit cards.  Will investors actually buy this junk, especially after having years where their losses were 10% and greater?  Their pool went from $69 billion in 2010 to $39 billion now.  Sounds like a safe investment. /s  Or are they just going to use these to turn the receivables into an asset on their books so that they may rehypothecate?  Either way, there are several other prospectuses on the EDGAR search page, so it is going to be a lot more than the $700 mil for their A6 notes.


Citibank Credit Card Issuance Trust

Issuing Entity


$700,000,000 1.32% Class 2013-A6 Notes of September 2016

(Legal Maturity Date September 2018)

Citibank, N.A.

Sponsor and Depositor

buzzsaw99's picture

well at least we know who is buying (and who is selling) the shittiest tranches (again)

Yen Cross's picture

  The mediums might change, but History always repeats BUZZ. That's why we're mortal. ;-)

Harbanger's picture

Yes mortal and decaying.  That's why change happens in cycles, imagine if the same fools given temporary charge lived forever.  Real change happens in the next 10 years, not because of anything but mortality.

RiverRoad's picture

The Fed, and they're not as stupid as we think they are, is damned and determined to destroy the markets as we knew them, or thought we did.  Why?  What's in it for them?

Yen Cross's picture

 I always knew that piece of shit NoDebt was a schill!

disabledvet's picture

Steve Schwartzman when he took Blackstone public was one of the great calls of "market tops" ever. In fact i remember that last good Anchor on CNBC commenting to said effect "back when it was okay to have doubts" instead of "hog wild lunatic fringe or else." In any case i think these companies are too huge to LBO now. In fact here's one of the "classic's": good luck LBO'ing anything given this debacle. plus you'd have to be nuts to do it anyways. the companies themselves are issuing the debt...some at ridiculously low rates...if I were a KSU or a GWR that's exactly what i would do actually. same goes for Amazon actually. why not raise...20 billion..."for corporate purposes"?

Atomizer's picture

Supposed it might be the right time to reignite the obvious thought provoking crisis in a poetic form.

Your Children Will...


Some will understand, while others will continue to see the system as a singular paradigm.