Loan Yielding 8 Percent Drown Out Fed’s Junk Debt Warning

The prospect of 8 percent yields can
drown out a lot of warnings when central bankers keep talking up
the need for easy-money policies to spur the economy.

That’s what investors in the junk-rated loan market were
offered by Formula One, two days after the Federal Reserve said
lax underwriting standards are setting up buyers of the debt for
losses due to higher defaults. In exchange, investors of the CVC
Capital Partners Ltd.-controlled racing company’s loans would
accept a lesser claim on assets and weaker protections that may
lead to greater losses if Formula One ever defaults.

While the Fed is trying to contain the risk-taking
unleashed by its own extraordinary stimulus, investors are
showing an increased willingness to sacrifice safeguards for
higher returns as benchmark interest rates remain close to zero
for a sixth year. That’s allowed some of the least-creditworthy
borrowers to raise $20.6 billion of the junior-ranked debt known
as second-lien loans this year, eclipsing 2013′s record pace.

“When the Fed tells me they are concerned about it, I know
it’s time to leave,” William Larkin, a money manager who
oversees more than $500 million at Cabot Money Management, said
in a telephone interview from his office in Salem,
Massachusetts. “I am cutting my exposure.”

Formula One

Issuers of second-lien debt have reduced their borrowing
costs by more than a percentage point this year, even as the
yield on first-lien loans, which generally provide the highest
claims on a company’s assets in a default, has increased.

Formula One is offering to pay 6.75 percentage points to 7
percentage points more than the London interbank offered rate on
the $1 billion covenant-light junior loan, with a one percent
minimum on the lending benchmark, Bloomberg data show. Libor (US0003M),
the rate at which banks say they can borrow from each other, was
set at 0.23 percentage point yesterday.

The company’s second-lien debt, along with a $1 billion
first-lien financing is being used to refinance and fund a
distribution to shareholders, according to a July 17 report from
Moody’s Investors Service.

Moody’s graded Formula One’s second-lien loan Caa2, a level
assigned to debt considered of poor standing and having very
high credit risk. Claudia Gray, a CVC spokeswoman who works at
Brunswick Group in New York, said the company declined to
comment about its offering of second-lien loans.

Bond ‘Substitute’

Investors are being paid as much as 3 percentage points in
extra yield to hold second-lien debt instead of first-lien
loans, with the average yield of 9 percent at the end of June,
according to Standard amp; Poor’s Capital IQ Leveraged Commentary
and Data. At the start of the year, the cost was 10 percent.

First-lien borrowings yield an average 5.3 percent from 4.8
percent at the start of 2014.

Companies, especially those controlled by private-equity
firms, prefer second-lien loans over junk bonds as they have
fewer restrictions that prevent them from being paid early,
according to Tim Broadbent, the New York-based head of Americas
leveraged loan syndicate at Barclays Plc.

“If the issuer doesn’t value pre-payability, they would do
bonds all day, every day,” he said.

Greater Losses

In a report published July 15 by the Fed as part of Chair
Janet Yellen’s semi-annual testimony to the Senate Banking
Committee, the central bank said it’s engaged in “strong
supervisory follow-up” to guidance given to banks in 2013 to
improve their underwriting standards for high-yield loans.

The market for loans rated below investment grade may be
vulnerable to deeper losses than in past cycles because
companies will struggle to refinance debt cheaply as rates rise
from record lows, Martin Pfinsgraff, the top large-bank
supervisor at the Office of the Comptroller of the Currency,
said this month in an e-mailed response to questions from
Bloomberg News.

“We’ve heard regulators voicing concern about cov-lite
loans,” Beth MacLean, a money manager at Newport Beach,
California-based Pacific Investment Management Co., said in a
telephone interview. “Second-liens are of greater concern as
they are more risky than covenant-light first-lien loans.”

Covenant-light borrowing typically lack standard
protections for lenders such as limits on debt relative to
earnings. A record $314.8 billion of such debt were arranged in
2013 and more than $165 billion have been issued this year, data
compiled by Bloomberg show.

Lower Recoveries

Most borrowers with second-lien loans don’t have any lower-ranking debt, which may mean recovery rates will be only
marginally better than those offer by unsecured bonds in a
default, according to a report published this month by Moody’s.

“We are seeing more deals where the second-lien loan is
structured as the junior debt as opposed to having unsecured
debt below them,” John Puchalla, a senior vice president at
Moody’s said in a telephone interview. “Even though they are
secured, if the company ends up defaulting, they would be the
first creditor class to absorb losses.”

Projections for recoveries from existing second-lien debt
in case of a default are as low as 25 percent, according to a
January Moody’s report written by Puchalla. That compares with a
historical average of 52 percent.

“Second liens are a much riskier segment of the market
with less liquidity,” Pimco’s MacLean said. “In a market where
investors are being pushed to take more risk to generate
returns, some are willing to take on more risky investments like
second liens.”

To contact the reporter on this story:
Sridhar Natarajan in New York at

To contact the editors responsible for this story:
Shannon D. Harrington at
Faris Khan, John Parry

Travel Company Loans Customers Google Glass, Asks Them to “Not Record …

British travel company Holidaysplease has struck up a deal with members of its loyalty program, offering to loan them Google Glass whilst they are vacationing.

However, this loan comes with numerous terms and conditions, with one of the companys policies being that the Google Glass should not be used to record nudity, content of a sexual nature, violence or other content likely to offend.

The policies also state that those who loan the glasses should respect the privacy of others and not to film people so as to make them readily identifiable unless with their permission, and that they shouldnt use the glasses in places where people will want enhanced privacy such as places of relative undress (beaches, pools, spas etc..) and other private areas such as toilets.

Related: Google Glass Banned from Restaurant, Causes Outrage

As the Google Glass starts to slowly make its way into the general publics consciousness, there are an increasing number of policies and restrictions being placed on users of the wearable tech. Last month it was revealed that the devices would be banned from all UK cinemas, and a huge debate escalated after it had emerged that a restaurants reputation had been smeared after its staff asked a customer to take off her Google Glass as she was making other customers uncomfortable. Katy Kasmai, founder of the Google Glass Explorers of NYC, posted a negative review of New York restaurant Feast following the incident, leading a large portion of her 3,000 followers to do the same, effectively dragging the restaurants name through the mud.

The LA Times reports that Holidaysplease is one of the first companies to come up with strict etiquette rules for the tech, but if the expensive headwear eventually cracks the mainstream market as Google hopes it will, you should expect to see many more around the corner.

Photo: Getty Images

How Will You Be Voting on City of Seattle Proposition No. 1 (the "Parks …

Yes. Im tired of the unhealthy way we have to constantly renew directly all these different individual funding mechanisms. The claim that the MPD will have no oversight is absurd; the City Council is its oversight and we elect them. Things work perfectly fine in jurisdictions where the elected officials directly oversee budget and tax matters.

Representative Democracy.

CMCOA receives donation from Morrison County

By Tina Snell, Staff Writer

After a presentation by Lori Vrolson, the executive director of Central MN Council on Aging (CMCOA), the Morrison County Commissioners voted to donate $2,534 to the council.

Through federal, state and individual funding, the CMCOA awards money to senior service providers that help seniors stay in their homes, whether a traditional house, an apartment or an assisted living facility.

The CMCOA, based in St. Cloud, works with 14 counties, adding Morrison in 2005.

“Federal funding has decreased 5 percent since sequestration in 2014 and it’s expected to be cut another 5 percent in 2015,” said Vrolson.

Through the Older Americans Act and state nutrition funds, the CMCOA contracts for home-delivered meals, grocery shopping services, transportation, caregiver support, chore help, legal services and health promotion and disease management for seniors.

Targeted are seniors who are frail or becoming so, who have high or moderate nutritional risk and those who are not eligible for medical assistance.

These services help curb the growing cost of health and nursing home care.

The qualifications to receive services from CMCOA include being at least 60 years old. The organization serves those in the greatest need. An in-home assessment by counties determine the eligibility.

The dollar amount asked for by Vrolson will enable the CMCOA to match funding received from the Federal Older Americans Act (OAA). In 2014, the CMCOA awarded $129,965 of federal OAA funding in Morrison County.

The $2,534 donation is based on the administrative operation of CMCOA in Morrison County by determining the number of seniors who are 60 or older.

Morrison County Commissioners’ Briefs

Other business conductied by the Morrison County Commissioners Tuesday included:

oVoting to allow Deb Gruber, county administrator, to maintain staff levels in the Social Services department since several resignations are pending;

oLicensing Taco Bell in Little Falls for a $451 fee;

oHearing a report from Emily Wilmes, an extension educator in livestock production, on how her first year on the job has gone. She said she is learning her way around and determining the needs of local producers; and

oApproving an exempt permit to Roll With It for a raffle at Rice Creek Hunting Preserve Oct. 7.

The next Commissioners meeting will be held at the Morrison County Government Center Tuesday, July 29, beginning at 8:30 am in the Commissioners’ board room.

Munster schools face financial woes

MUNSTER | The School Town of Munster is in rough financial straits, including being behind on NIPSCO bills, according to information provided at Monday’s School Board meeting.

Treasurer Janice Swanson told the board the school corporation will “continue to spend every nickel we take in. We are behind on utility bills. … We have to watch because there are three pays (pay days) in August.”

The general fund was estimated to be more than $7.6 million in debt as of Jan. 1, the financial reports indicate. As of the end of July, that debt was $8.3 million. The general fund includes all major expenses for the school corporation, including salaries

Revenue continues to lag behind expenses, Swanson said.

“We are working on plans to reduce our expenses,” said Supt. Jeffrey Hendrix, who began his tenure in July by ordering an audit performed on the school corporation’s finances.

“We are trying to get our expenses below our revenue,” he said.

A host of recent resignations will help the process because those positions may not be filled.

“We are scrutinizing every position,” Hendrix said.

For example, the resignation of the head of maintenance will save the district about $100,000.

“We are looking at energy savings to reduce our utility costs,” Hendrix said. A company will soon begin a study of how to cut energy usage that will be performed at no cost to the school district, he added.

Part of the problem is the change in state funding for public education, the superintendent said. Funding is based on student counts completed in September, February and May, which an estimate for next year.

“We really can’t budget for the school year because the state may decide that our February numbers may be lower (than the September numbers),” Hendrix said.

Assistant Superintendent Steven Tripenfeldas told the board that based on registration figures, enrollment in the Munster schools is down this year with an estimated 3,900 students in all grades.

“That’s 40 below what we had last year,” he said.

Munster receives less than $5,000 per student funding from the state, Lawson said.

That is below even the average of $5,800, which is what the state says it takes to educate a student, said school board member Melissa Higgason.

Hendrix said once the school corporation can accomplish the task of having more revenue than expenses, $2 million of the $3 million the corporation receives in the referendum monies approved by Munster voters can be used to meet year obligations.

“This wasn’t a problem that happened overnight. It won’t be solved overnight,” he said.

Bank of Hawaii offering financial assistance programs for Iselle victims

Bank of Hawaii is initiating three financial assistance programs to help residents in the Big Island and Maui affected by Hurricane Iselle.

The programs will provide access to cash through special loan programs, or relief on existing Bank of Hawaii loans through loan extensions or forbearances. Special program features include low interest rates on loans, loans with no payments for the first three months, fast approval and quick funding, reduced payments with loan terms up to 60 months and loan amounts up to $25,000.

Depending on the loan program, funds can be used to provide cash relief for emergency supplies and living essentials; repair homes, vehicles, or both, replacement of living essentials or to boost working capital needs; or receive forbearance or an extension on existing loans.

“Although the majority of the state escaped the brunt of the storm, many residents on the Big Island and Maui are still dealing with the aftermath,” said Peter Ho, chairman, CEO and president of Bank of Hawaii, in a statement. “These financial emergency relief programs are designed for quick approval to allow people to recover as swiftly as possible. We want to help people restore normalcy in their lives and we have loan officers ready to work with individuals to assess their needs.”

Bank of Hawaii branches in the impacted areas are in Pahoa and Waiakea on the Big Island and Pukalani on Maui. Interested customers can call Bank of Hawaii’s customer service center on Oahu at 1-888-643-3888.

Jason Ubay covers tourism and finance for Pacific Business News.

‘Grief is a huge hole that you have got to get away from’

In 2011, she developed a rare and difficult to diagnose blood disorder, which led to a bout of pneumonia and then eventually organ shutdown and kidney failure. Just two years before, she had lost Paul, her husband of almost 50 years, when he died suddenly of a brain tumour, leaving Vincenzi in a pit of grief. Getting back to work on her book was the start of her recovery, she says.

Vincenzi writes good old-fashioned family sagas with modern themes of sex and business thrown in for good measure. She started her career as a fashion and beauty journalist in London in the swinging 60s and only started writing books in the 80s because she had heard stories of the mad money advances that were being paid for the sex and shopping novels of the era.

Its not a very edifying story, she says. I had no desire to be a novelist. It never entered my head and I just loved being a journalist. It was the 80s and there was a lot of silly money about and I thought the money would be nice and I could just do one and go back to being a journalist. So I thought it was worth a try.

Jilly Cooper is a great friend of mine and she said you should go to Desmond [Elliott, the literary agent] and he said what I want is three chapters and a dramatis personae and well see.

It took her a while because she had four children and so by the time it came up for auction she had almost given up thinking about it.

Do you know when you have wonderful days when everything goes right and you can find a parking space and you just feel great and then you find a dress that you really hadnt been looking for and then someone says, yes, Ill do that interview.

I had one of those days. I was making the childrens tea when my agent rang up and said are you sitting down, dear? I said no, and he said, well sit down. And I thought, oh no. And then he named this incredible sum.

Her debut novel Old Sins had been auctioned for £100,000. She and her husband had been fantasising about what would happen if it sold for £10,000.

It was totally life-changing of course. Paul and I went out that night and I cant tell you how drunk we were. Then in the morning I thought I dont know how Im going to write this. I rang up my editor and said something terrible has happened. Its not working out how I said it would in the synopsis.

I thought, Ill have to give the money back. She said, dont worry about that, carry on, find out what happens! And thats how my modus operandi came about.

Today, Vincenzi looks frail but glamorous and her attitude is stoic and no-nonsense. She knows how lucky she is to be alive. There were times when she wasnt so optimistic though, particularly when she was recovering.

It requires a lot of health and energy to be optimistic and sometimes I just thought I dont want to go on with this, whats the point? I was more miserable afterwards than during. Ive got a cottage in Wales that I love more than anywhere in the world and I couldnt go there. I thought, Im writing crap, I cant look after the grandchildren anymore – the other grannies were taking over – and its very hard in the face of that to remain optimistic and positive. That was the worst thing, staying on top of it. It was like having a baby – you think, this has got to end. One way or the other this is going to end. But it was really hard.

Slowly, she got better but ended up deleting four months of work. It was complete rubbish. I had to press the delete button. I think my head was in a funny place.

Famously, Vincenzi doesnt plot but finds out what happens along the way, which is perhaps why her books always weigh in at about 1,000 pages.

I just thought a really good thing to write about now would be a company going down because people were losing their jobs.

Vincenzi has had what she calls one proper job in her life, where she worked in the marketing department of a cosmetic company but for the most part she has worked as a journalist, mainly for daily national papers and fashion magazines in the UK.

I was an assistant to a wonderful woman called Felicity Green, who was the first woman to be on the board of a national newspaper and she was a huge power.

There are plenty of powerful women in her new novel, which looks at the financial problems of a family-run cosmetics company.

Women had to fight a damn sight harder in those days. You still do, but all this stuff about sexual harassment. . . I was always having my bottom pinched and youd just say, oh stop it! If I had said to Felicity Green Mr so-and-so just pinched my bottom, she would have said, go on, grow up and get on with your article.

It was so tough being a woman. You were just regarded to be lucky to be there at all because you were a woman.

And if you were a mother you were even luckier. I was fired when I was on maternity leave, which was six weeks back then.

She thinks the conflict between work and home life is still difficult for women to negotiate and being a mother is now akin to an Olympic sport.

Its extraordinary, the changes Ive seen. When I had my babies I was the only working mother I knew and I was something of a pariah I have to say. There was no pressure to work.

The pressure was not to work. Babies then were a pretty picture on fathers desk, not even to be mentioned. Its so different now. Its another world. Now we have to have a job and be successful and be perfect mothers and be very thin and the pressure! I do feel very sorry for mothers these days.

Theyve turned mothering into an industry – you have to have this pram, this food, dont let it cry for more than two-and-a-half seconds or it will be emotionally damaged, the sun comes out and a chemist shop of products is produced and the food has all got to be organic.

I just feel very sorry for them. We were much more free range. There was no health and safety so you threw them into the back of the car. We had a Volvo estate and quite often I had seven children in the back, some in the boot, some on the back seat, and Im sure it was very dangerous but at least it wasnt a terrible worry. So I think we had it much easier in some ways.

She still loves writing and says she will never retire. Its like wanting a drink. . . you know that feeling? Well, perhaps you dont but its that feeling.

And, again, she will always be grateful for the fact that it was the thing that got her through her husbands death.

In that awful grief, its hard to take comfort in anything but what you need is things to do to, things to put between you and it.

The writing gave me a reason to get up in the morning. It was a lifeline. I visualise any kind of grief as a huge, yawning hole that youve got to get away from. The ice is so thin in the middle and the writing every day helped me edge back.

A Perfect Heritage by Penny Vincenzi is ­published by Headline Review.

Life in Brief

Name: Penny Vincenzi.

Age: 75.

Lives: Splits her time between her home in England and a cottage in Wales.

Family: Four daughters and eight grandchildren.

Best known as: The much-loved door-stop-sized blockbuster writing author who writes best-selling novels in the vein of her friend Jilly Cooper.

Likes: Spending time with her grandchildren.

Dislikes: The many rules and regulations that modern mothers feel they must abide by today before they can consider themselves good mothers.

Indo Review