Dubai fallout: Shares extending losses, Dow futures off over 250pts

kennyboy66_2

Generali wrote: »

The obvious things for me are private equity funds which bought lots of assets expensively on credit. There was a particularly interesting form of debt used by some funds known as a PIK bond or Payment in Kind bond.

How it works is that instead of making a regular interest payment, the interest is rolled up into the capital value of the bond and paid at some point in the future. They are very high risk and so pay a very high rate of interest - the Glazers used one to partly finance their takeover of Man Utd and from memory it has a rate of interest of 14.675% and the first payment comes due in 2011.

Now in many cases there will have been no payment to make so far so no default on the bond even if the company concerned isn't doing so well. If that is the case, it would be reasonable for the value of the bond on the books of the holder (often but not always a bank) to be higher than the original amount of the debt because of the subsequently accrued interest and because interest rates have fallen making a high yielding bond even more valuable.

I suspect the rate of default on PIKs is likely to be high. It remains to be seen whether the high rates of interest no them are high enough to recompense the holders for the default rate.

As many private equity models were based on buying firms, loading with debt, hold for 2 years (to maximise tax advantage of taper relief) and selling on to someone else, its hard to see why they wouldn't be in serious trouble.

PIK's seem remarkably like junk bonds of the 1980's and in the end the answer was, no the yield never made up for the default. Although plenty of people got rich selling and trading them.

Generali wrote: »

There is a double whammy with the stimuli (stimulouseses?) - the cost of servicing Government debt goes up and the withdrawal of them cuts GDP at the same time.

One side effect of gilt yields going up will be that some of the pension deficits of PLC will fall, possibly quite substantially (even though the value of the Gilts in the pension will fall).

StevieJ

HammerSmashedFace wrote: »

This kind of thing really isn't a shock is it ? I've been saying for the last 9 months that the recovery is fake, here in this country and around the world. The fallout will likely be worse now over the next 2 years as the truth is slowly exposed.
.

Dubai was in dire straights 9 months ago, the only thing that has changed is the fact that the Abu Jabis are refusing to back them and letting them squirm.

StevieJ

I notice the FTSE in back positive today and back above that 5200 support level, the market does appear resilient even after major shocks.

inspector_monkfish

StevieJ wrote: »

Dubai was in dire straights 9 months ago, the only thing that has changed is the fact that the Abu Jabis are refusing to back them and letting them squirm.

Do they want their Money for Nothing ???

inspector_monkfish

StevieJ wrote: »

I notice the FTSE in back positive today and back above that 5200 support level, the market does appear resilient even after major shocks.

13:15 27Nov09 - GBP/USD: 1.64 Handle Reclaimed, Dow Futures Improve


London, November 27.

Cable has reclaimed a 1.64 handle, with positive UK stocks and a Dow futuresimprovement lending support. Dow futures are currently down 185 points, havingbeen down by over 300 points in early European trade today. The US stock marketwas closed for Thanksgiving yesterday, so has yet to react to the news aboutDubai (<TGM2339>). The cash open is at 14:30GMT.

1.6442 (today"s late European morning high), 1.6466 (yesterday"s low) and 1.6500 (yesterday"s European morning base) are sterling resistance levels. A 1.6500 option strike rolls off at today"s 10am Eastern NY cut (15:00GMT). 1.6272 was the 24-day low plumbed in early European trade today. 1.6700 was yesterday"searly Europe high.

StevieJ

inspector_monkfish wrote: »

Do they want their Money for Nothing ???

As I was typing I was going to make that connection but thought better of it

inspector_monkfish

StevieJ wrote: »

As I was typing I was going to make that connection but thought better of it

yeah righto..... u so WISH you had thought of it first.....;)

Degenerate

abaxas wrote: »

Why worry, the UK government will just print £100 billion and send it over with some virgin eastern european prostitutes.

They can have the £100 billion, but let's not give away our most valuable assets.

Really2

abaxas wrote: »

virgin eastern european prostitutes.

Is that a new Branson business?

abaxas

Really2 wrote: »

Is that a new Branson business?

Head entertainment :P