Friday, April 2, 2010

A debt financed economy (US)

Heres some takeaways from firms who suffered pain, good to learn from mistakes from them. Alot of them underestimated the impact of the structural issues and either went in too early or did not hedge. The developed economy was running on benign monetary policies, budget deficits and bullish views on assets. This has manifested itself into stratospheric levels of debt in 3 forms:
  • Corporate - Firms doing LBOs - $430 b in 2007 with ev/ebitda of 6-9x being common. Such firms will need to recap in 2010 and years to come. Maturities will come in 2012 and mostly 2013-14.
  • Real estate - The bubbly view on assets also hit properties. It did not help that residential mortgages increased dramatically from US2.3 to 3..3 tr in 2004-07 (13% cagr). Securitization market grew US400 to 800b (25% cagr) in the same period. This led many to believe the large institutional cash to invest, low rates environment and the insufficient supply outlook was real. Cap rates were compressed from 9 to 4+%. 
  • In 2009, only 40% of commercial CMBS issued post 2002 have matured and US900b will come due in the nest 3 years. Most of this will come from savings banks and institutions. On maturity, banks and CMBS trusts will then choose to either foreclose, restructure or roll over.

  • Sovereign - US, UK, Japan and Eurozone have collectively US 25.9 tr in sovereign debt including T bills and directly issued central government debt. Most countries with exception of UK over relied on short to medium term funding and 62% of the debt (US 16 tr)will come due in 2014. 
  • This will compete with the LBO and CRE refinancing. Governments can do 3 things, improve GDP, cut outflows or simply inflate their way out. First 2 will mean long recovery, higher taxes, less incentives. Printing money does not apply to weaker Eurozone nations. Inflation will solve the issue and yet raises rates for future debt issuances, however it will not completely eliminate the debt issue, especially to comply with the Maastricht treaty of 60% debt to GDP levels by 2032.

Japan seems to be in quite some situation, I'll see what I can contribute here in the next posts.

The early part of the coming decade, we will do fine with low rates and improving confidence and operations across industries. So we can definitely see rising utilization, improving inventory cycles and perhaps even opening debt capital markets. However, in the long run, rates will make a even stronger comeback in a bid to curb inflationary pressures and to avoid a irrational transfer of benefit from the prudent saver to the leveraged consumer.



The giant spending spree must come to an end sometime.

Post a Comment