Monday, February 25, 2008

The Coming Leveraged Debt Write-Downs

by Calculated Risk on 2/25/2008 11:43:00 AM

Goldman Sachs, in a research note this morning, noted that they expect "major write-downs" in leveraged loans this quarter. They estimated leveraged debt write-downs this quarter of $1B to $2B for several firms, with write-downs at Citi of $2.2B and Merrill of $1.3B.

Update: This is just the leveraged debt write-downs. Total write-downs at Citi could be $12 Billion (see MarketWatch: More credit costs seen weighing on banks, brokers)

They also noted there will be significant write-downs for RMBS and CMBS (residential and commercial mortgage backed securities) with special concern about CMBS.

Of course Goldman doesn't cover Goldman. But others do ...

From the WSJ: Goldman's Profit Magic May Be Fading

One of the biggest worries is Goldman's large exposure to leveraged loans, which totaled $42 billion at the end of the firm's last quarter, according to analyst calculations. During the deal boom, Goldman was a huge player in financing private-equity buyouts. But investors started to avoid buyout loans last summer, causing the debt to pile up on balance sheets and their market values to drop.

The result: Goldman is in the sort of sticky situation it largely avoided with subprime mortgages. The firm's leveraged-loan exposure is equivalent to 1.1 times its net worth, versus an average of 0.7 times for U.S. brokerage firms, according to Credit Suisse analyst Susan Roth Katzke. Write-downs on leveraged loans could total as much as $1.7 billion in the current quarter, Mr. Trone estimates.
And it could be worse if one or more of the large LBO companies defaults on their debt. As the WSJ noted:
[A]larming news, like the bankruptcy filing of a company overwhelmed by its LBO-related debt, would raise the specter of more steep markdowns.