fundamentals no longer matter – until they suddenly do



Posted by Ed 38 days ago
Everything’s Fine Until Suddenly it Isn’t: How a “Leveraged Loan” Blows Up
Kudos to the private equity firm. These things don’t happen overnight for companies. They happen overnight only for investors.
Golden Gate Capital – the private equity firm now infamous for asset-stripping its portfolio company Payless ShoeSource into bankruptcy and liquidation – strikes again with another of its portfolio companies, Clover Technologies, whose $693-million leveraged loan has suddenly gone to heck.

Slices of that leveraged loan are traded like securities. But because leveraged loans are loans, not securities, the SEC doesn’t regulate them. No one regulates them, though the Fed wrings its hands about them periodically. And there are $1.3 trillion of them.

The market for them is very illiquid, even during good times, and before Clover disclosed some issues on July 9, the loan still traded at 97 cents on the dollar, according to Bloomberg. This was the day investors, such as leveraged loan mutual funds and institutional investors that held these slices, suddenly woke up with the foul odor of debt restructuring and bankruptcy in the air. Within just a few days, the price of the loan plunged 35% to 62.625 cents on the dollar.

The loan was “covenant-lite,” giving fewer protections to investors and allowing the company and its owners to get away with all kinds of things. This included the absence of certain disclosure requirements. 


Ed 38 days ago

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