Monday, August 27, 2007

Paperstand (HD, ABK, MBI, AGO)

According to the WSJ, the global credit crunch has begun to put a squeeze on the buyout boom, with banks and private-equity firms forcing Home Depot (HD) to sell its struggling wholesale supply unit for much less than what had been agreed to just 2 mo’s ago. Home Depot's board yesterday agreed to sell Home Depot Supply for $8.5bn to Bain Capital, Carlyle Group and Clayton, Dubilier & Rice, about 18% less than the price hammered out in June. In addition, Home Depot itself will hold about 12.5% of the unit's equity and guarantee some of the debt issued by the banks to finance the acquisition. That's significant because if the banks can't sell the debt in bond mkts, and it sits on their balance sheet, they have to mark down its value, which some can ill-afford to do.

“Heard on the Street” column out saying that as the bond-mkt mess grew this summer, investors dropped shares of the largest insurers. Ambac Financial Group (ABK) took the biggest hit, falling 38% from the beginning of the year. MBIA (MBI) fell 30%, and Assured Guaranty (AGO) slid 16%. "The selloffs from the stock are unprecedented in their speed," said Heather Hunt, of Citi. While the share prices have since rallied from their lows, they remain down for the year and their valuations are right near their historic lows. Investors may have been too hasty in dumping shares this time, some analysts say. These co’s had minimal exposure to subprime residential mortgages. And b/c they typically apply tougher underwriting standards and hold higher-grade portfolios than the rest of the mkt, they should fare better than the overall mkt in terms of losses. That isn't to say shares of these co’s will follow a smooth slope upward. Bond insurers will most likely have to shoulder losses for some mortgage securities, and things may look bad at different periods. But ultimately their payments, which will be spread out over a long period, will be manageable. "The business model of the [bond] insurance co’s is that they worry about the actual payments they're going to make going forward as opposed to mark-to-mkt hits," said Matt Sauer, of Ariel Capital Mgmt. "It's a potential that they're going to sustain some losses...but they're going to weather this."

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