Credit Crisis To Hit Business Debt

The Age

Saturday August 23, 2008

By Marika Dobbin

THE subprime contagion is still spreading, with major banks in Australia and around the world facing billions more in potential write-downs - but this time to their corporate debt portfolios.

While much of the subprime carnage has been in residential mortgage-backed securities, such as collateralised debt obligations (CDOs), analysts are predicting that deteriorating economic conditions will further devalue corporate mortgage-backed securities such as corporate loan obligations (CLOs).

Goldman Sachs this week predicted the US's biggest investment banks would record gross write-downs of

$US17 billion ($A19.5billion) in the third quarter because of devaluations in corporate mortgage-backed securities, leveraged loans and other troubled assets.

After National Australia Bank last month made provision for $1 billion in write-downs on its CDO portfolio, analysts speculated it would make further provisions of about 10% on its $4.5 billion of corporate securities, held in the same conduit facilities.

But a Citi report has nominated ANZ as most at risk of further provisions, as it was the biggest trader of securities among the Big Four. MM&E Capital managing director Tom Elliot said the subprime crisis had already spread to corporate debt and more write-downs in Australia were inevitable.

"NAB has a multibillion-dollar portfolio of CLOs that hasn't been written down one dollar," he said "I think that's the next big one to come.

"There are plenty of portfolios of loans out there that haven't been marked down and, once one person does it, the others will have to do it too.

"The crisis in terms of how it affects balance sheets is still largely lower-quality residential loans, but I think what we are seeing with Babcock & Brown is telling us it is going beyond that."

AMP Capital Investors head of investment strategy and chief economist Shane Oliver said default rates among corporate borrowers were rising and still more companies, especially those heavily geared, were headed for trouble.

"Hopefully, that will be relatively contained and it should largely be already reflected in credit spreads, the gap between the rate that corporates borrow at and the rate the Government borrows at," he said. "Those spreads have blown out in anticipation of a rise in corporate defaults."

© 2008 The Age

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