{"id":200427,"date":"2021-04-12T19:06:00","date_gmt":"2021-04-13T00:06:00","guid":{"rendered":"https:\/\/www.panix.com\/~msaroff\/40years\/2021\/04\/12\/yeah-this-is-going-to-end-well\/"},"modified":"2021-04-12T19:06:00","modified_gmt":"2021-04-13T00:06:00","slug":"yeah-this-is-going-to-end-well","status":"publish","type":"post","link":"https:\/\/www.panix.com\/~msaroff\/40years\/2021\/04\/12\/yeah-this-is-going-to-end-well\/","title":{"rendered":"Yeah, This is Going to End Well"},"content":{"rendered":"

You know, when I read the headline, “Wall Street Finds New Way To Finance Unprofitable Tech Firms<\/span><\/b><\/a>, I have a feeling of impending doom.<\/p>\n

I know that there are cartoons to explain the process, so it does not invoke Saroff’s Rule<\/a>, “If a financial transaction is complex enough to require that a news organization use a cartoon to explain it, its purpose is to deceive<\/i>,” but this sounds like it’s another crack-up waiting to happen.<\/p>\n

They are called Asset Backed Secularizations, and every sentence seems of the article implies greater and greater leverage and greater uncertainty:<\/p>\n<\/p>\n

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No earnings? No problem. Investors are funneling money to unprofitable software companies through a new type of debt deal.<\/p>\n

Nonbank lenders like Golub Capital, AllianceBernstein Holdings LP and Owl Rock Capital Partners LP have issued asset-backed bonds to help finance about $2 billion of loans to such companies since November, according to data from Kroll Bond Rating Agency Inc. and S&P Global Market Intelligence. Many of the loans are to fast-growing, but still unprofitable, software enterprises.<\/span><\/p>\n

\u2026\u2026\u2026<\/span><\/p>\n

The loans backing the complex bonds\u2014known as asset-backed securitizations, or ABSs\u2014can be small, like the $25 million Golub provided to software delivery specialist CloudBees Inc. Other deals run in the hundreds of millions of dollars, like the $300 million Owl Rock lent to back the leveraged buyout of software security company Checkmarx by private-equity firm Hellman & Friedman LLC. Golub has been making the loans since 2013 and has had no defaults, even during the pandemic-induced economic downturn last year, according to a credit-rating report.<\/span><\/p>\n

\u2026\u2026\u2026<\/p>\n

Still, some fund managers say the new deals pile debt on debt, disregarding the risk of default in the relatively immature companies.<\/p>\n

Demand for ABS backed by conventional corporate loans called collateralized loan obligations, or CLOs, surged late last year<\/a> as markets recovered from the pandemic selloff. But, the new transactions are so unorthodox that large credit-rating firms Moody\u2019s Investors Service and Standard & Poor\u2019s Global Ratings don\u2019t rate most of them, the people involved said. <\/p>\n

Instead, the bulk of the deals have gotten ratings from Kroll Bond Rating Agency, one of three smaller firms competing with Moody\u2019s and S&P for credit-ratings business.<\/p>\n

\u2026\u2026\u2026<\/p>\n

A single investment bank, MUFG Securities Americas Inc., has arranged all of the deals for the lenders, selling them primarily to U.S. investors specializing in ABS, the people said. A spokeswoman for MUFG, a subsidiary of Japan\u2019s largest bank, Mitsubishi UFJ Financial Group Inc. declined to comment.<\/p>\n

\u2026\u2026\u2026<\/p>\n

The average credit quality of the loans is the equivalent of debt with a single-B or triple-C rating, two of the lowest rungs on the credit-rating ladder, according to research by Kroll. If the borrowers default, it is unclear how much lenders will recover. \u201cIt is a relatively new asset class with limited recovery data,\u201d Kroll said in a report.
<\/span><\/p><\/blockquote>\n

 Let’s see:<\/p>\n