U.S. Corporate Borrowers Should Beware the Ides of March

The normally boring Saturday Wall Street Journal's 'Money & Investing' section had some interesting tidbits. PricewaterhouseCoopers [PWC] declared that auction rate securities are not cash equivalents, but instead short-term investments. Evan the phrase "short-term" is questionable.

Thornburg Mortgage (TMA) is trying to satisfy margin calls from J.P. Morgan (JPM), Goldman Sachs (GS) and others by selling $8B in mortgage securities. The bids are coming in at 50 to 80 cents on the dollar.

Carlyle Capital, leveraged at 32 times equity, is also having funding problems. Carlyle Capital has $21.7B in mortgage securities with only $670M in investor equity. Carlyle Capital's creditors include Citigroup (C), Bank of America (BAC), UBS (UBS) and Deutsche Bank (DB). Carlyle Capital's parent (the Carlyle Group) generation of $330M in investing banking fees was not enough to hold back the banks.

The most intriguing tidbit was in the WSJ article "March may be quite cruel for borrowers in U.S." The article describes how Citigroup (C), National City (NCC) and PNC Financial (PNC) are clamping down on loans to businesses with sales between $100M and $1B. They are especially cautious of home buildings, retailers and restaurants. These types of loans were often sliced and sold to other banks and investors. These market participants can restrict any modifications to the loans and any further issuance of credit. Some of the hedge funds actually want to engineer a default, so they can trade their loans for equity. This strategy is known as "loan to own".

Disclosure: Author is long C, NCC and UBS.