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The US housing market just keeps getting worse.
Yesterday came news that existing home sales fell to a five-year low in June, worse than expected. Meanwhile, sales of single-family homes dived at an annual rate of 30% during the second quarter, the steepest fall in 28 years, according to the National Association of Realtors.
And even though people are getting fed up and pulling their houses off the market (there was a 4.2% drop in the number of homes for sale), supply remains at a 15-year high, of 8.8 months’ worth of sales.
But the really worrying news was happening elsewhere in the markets…
The US housing slump continued to churn out the bad news yesterday, as existing home sales plunged.
“The numbers were not terribly surprising, but they were somewhat disturbing,” Mike Schenk of the Credit Union National Association told Marketwatch.com. “The slump in housing will be longer and deeper than advertised.”
Bad news in US housing is no longer a shock to the markets. But news that buy-out deals are now running into serious trouble amid the turmoil in the credit markets, was of more concern.
The eight banks trying to sell £9bn worth of loans, funding private equity group KKR’s purchase of Alliance Boots have stopped trying to flog off the first £5bn due to lack of demand. It’ll sit on their books until – they hope – demand picks up.
However, as Nicole Lee points out on Breakingviews.com, the “banks decided to slash the prices on £1.75bn of riskier debt to get investors to bite.” The details are somewhat technical – basically they are selling £1bn of the loans at a 4% discount to face value, and another £750m at a 5% discount. Suffice to say that the banks are almost certain to lose money on the deal, as the discounts offered have more than wiped out the fees they would normally charge to underwrite these deals.
The discounts are also larger than those offered on other deals, says Lee. This suggests that the banks aren’t too optimistic about credit conditions improving. “Boots’ underwriters apparently don’t think investors are going to settle for Libor plus 6.5% any time soon.”
(A brief note of explanation – Libor is basically the rate that banks lend to each other at. Until recently, 6% to 6.5% was the rough premium over this rate that investors in moderately risky debt demanded. But this has since shot up to 8% to 8.5% over Libor).
Anyway, back to Lee. “So the banks swallowed hard and dropped the price until buyers came knocking. But with some $50bn of buyout debt in the pipeline in Europe, that’s not a tactic they can afford to repeat very often.”
In the US, meanwhile, similar problems hit Cerberus’s $20bn purchase of US car maker Chrysler. Banks are having to sit on $12bn of the debt, and they had to improve terms on $6bn of it.
As Paul J Davies and Saskia Scholtes point out in the FT, “the two deals will linger on banks’ balance sheets, potentially cutting appetite for underwriting fresh leveraged buy-outs.” Marek Gumienny of buy-out firm Candover told the paper that deal volumes are now likely to slow down. “We’ve heard rumours that some banks have shut up shop for summer: no more credit.”
That might be an exaggeration – or perhaps not – but in any case, the lending environment is becoming a lot less forgiving. And if the current squeeze continues, it seems increasingly likely that a big deal could collapse altogether.
It’s going to be long, nerve-wracking summer for the banking sector.
Turning to the wider markets…
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The FTSE 100 fell a further 44 points to 6,454 on Wednesday, adding to Tuesday’s 125-point slump. Supermarket chain Sainsbury fell 7p to 583.5p after large shareholder Robert Tchenguiz said he wouldn’t back a takeover bid from Qatari’s Delta Two at the proposed 600p a share. For a full market report, see: London market close
On the Continent, stocks also fell. The Paris CAC-40 shed 70 points to close at 5,837, and the Frankfurt DAX-30 dropped 114 points to 7,692.
Across the Atlantic, the Dow Jones clawed back 68 points to close at 13,785. The tech-laden Nasdaq was 8 points higher, at 2,648, and the S&P 500 gained 7 points, to 1,518.
In Asia, this morning, the Nikkei 225 fell 156 points to 17,702.
Crude oil was trading at around $76.42 this morning in New York, while Brent Spot was at $77.86 in London.
Spot gold was trading at around $676 this morning. (For in-depth daily gold reports, see: investing in gold. Silver, meanwhile, was trading at $13.11.
In the currency markets, the pound was at 2.0507 against the dollar and 1.4945 against the euro this morning. And the dollar was at 0.7291 against the euro and 121.31 against the Japanese yen.
And in London this morning, oil giant Royal Dutch Shell saw second-quarter profit rise by 18%, helped by strengthening margins at its refining operations.
And our two recommended articles for today…
Why dividends matter – and how to find them
– A healthy dividend income is the cornerstone of any successful portfolio. Tim Bennett explains what you need to know: Why dividends matter – and how to find them
The gold carry trade
– The majority of gold carry trade transactions take place on the London Bullion Market – an over-the-counter market with little-to-no transparency, writes Nick Jones: The gold carry trade
Yesterday came news that existing home sales fell to a five-year low in June, worse than expected. Meanwhile, sales of single-family homes dived at an annual rate of 30% during the second quarter, the steepest fall in 28 years, according to the National Association of Realtors.
And even though people are getting fed up and pulling their houses off the market (there was a 4.2% drop in the number of homes for sale), supply remains at a 15-year high, of 8.8 months’ worth of sales.
But the really worrying news was happening elsewhere in the markets…
The US housing slump continued to churn out the bad news yesterday, as existing home sales plunged.
“The numbers were not terribly surprising, but they were somewhat disturbing,” Mike Schenk of the Credit Union National Association told Marketwatch.com. “The slump in housing will be longer and deeper than advertised.”
Bad news in US housing is no longer a shock to the markets. But news that buy-out deals are now running into serious trouble amid the turmoil in the credit markets, was of more concern.
The eight banks trying to sell £9bn worth of loans, funding private equity group KKR’s purchase of Alliance Boots have stopped trying to flog off the first £5bn due to lack of demand. It’ll sit on their books until – they hope – demand picks up.
However, as Nicole Lee points out on Breakingviews.com, the “banks decided to slash the prices on £1.75bn of riskier debt to get investors to bite.” The details are somewhat technical – basically they are selling £1bn of the loans at a 4% discount to face value, and another £750m at a 5% discount. Suffice to say that the banks are almost certain to lose money on the deal, as the discounts offered have more than wiped out the fees they would normally charge to underwrite these deals.
The discounts are also larger than those offered on other deals, says Lee. This suggests that the banks aren’t too optimistic about credit conditions improving. “Boots’ underwriters apparently don’t think investors are going to settle for Libor plus 6.5% any time soon.”
(A brief note of explanation – Libor is basically the rate that banks lend to each other at. Until recently, 6% to 6.5% was the rough premium over this rate that investors in moderately risky debt demanded. But this has since shot up to 8% to 8.5% over Libor).
Anyway, back to Lee. “So the banks swallowed hard and dropped the price until buyers came knocking. But with some $50bn of buyout debt in the pipeline in Europe, that’s not a tactic they can afford to repeat very often.”
In the US, meanwhile, similar problems hit Cerberus’s $20bn purchase of US car maker Chrysler. Banks are having to sit on $12bn of the debt, and they had to improve terms on $6bn of it.
As Paul J Davies and Saskia Scholtes point out in the FT, “the two deals will linger on banks’ balance sheets, potentially cutting appetite for underwriting fresh leveraged buy-outs.” Marek Gumienny of buy-out firm Candover told the paper that deal volumes are now likely to slow down. “We’ve heard rumours that some banks have shut up shop for summer: no more credit.”
That might be an exaggeration – or perhaps not – but in any case, the lending environment is becoming a lot less forgiving. And if the current squeeze continues, it seems increasingly likely that a big deal could collapse altogether.
It’s going to be long, nerve-wracking summer for the banking sector.
Turning to the wider markets…
Enjoying this article? Why not sign up to receive Money Morning FREE every weekday? Just click here: Sign up for Money Morning
The FTSE 100 fell a further 44 points to 6,454 on Wednesday, adding to Tuesday’s 125-point slump. Supermarket chain Sainsbury fell 7p to 583.5p after large shareholder Robert Tchenguiz said he wouldn’t back a takeover bid from Qatari’s Delta Two at the proposed 600p a share. For a full market report, see: London market close
On the Continent, stocks also fell. The Paris CAC-40 shed 70 points to close at 5,837, and the Frankfurt DAX-30 dropped 114 points to 7,692.
Across the Atlantic, the Dow Jones clawed back 68 points to close at 13,785. The tech-laden Nasdaq was 8 points higher, at 2,648, and the S&P 500 gained 7 points, to 1,518.
In Asia, this morning, the Nikkei 225 fell 156 points to 17,702.
Crude oil was trading at around $76.42 this morning in New York, while Brent Spot was at $77.86 in London.
Spot gold was trading at around $676 this morning. (For in-depth daily gold reports, see: investing in gold. Silver, meanwhile, was trading at $13.11.
In the currency markets, the pound was at 2.0507 against the dollar and 1.4945 against the euro this morning. And the dollar was at 0.7291 against the euro and 121.31 against the Japanese yen.
And in London this morning, oil giant Royal Dutch Shell saw second-quarter profit rise by 18%, helped by strengthening margins at its refining operations.
And our two recommended articles for today…
Why dividends matter – and how to find them
– A healthy dividend income is the cornerstone of any successful portfolio. Tim Bennett explains what you need to know: Why dividends matter – and how to find them
The gold carry trade
– The majority of gold carry trade transactions take place on the London Bullion Market – an over-the-counter market with little-to-no transparency, writes Nick Jones: The gold carry trade