Say goodbye to easy money - and watch out for the far-reaching effects.
The drying up of the free-flowing cheap-debt spigot has been battering the housing market for months, and it's now spilling over to other parts of the financial world, like leveraged takeovers.
There is no denying it. It is ugly out there, wrote the influential credit-market watchers at Standard & Poor's Leveraged Commentary & Data.
Now that buyout shops are struggling to get their debt-laden deals done, it could stall Wall Street's record-setting rise since stock investors have relied on takeover activity to drive up share prices.
Same goes as companies face higher debt costs, which potentially could crimp their profits, steer them away from heavily financed activities like stock buybacks and slow their hiring.
As for housing, things have gone from bad to worse in recent days as credit-rating agencies announced they will downgrade billions of dollars in bonds backed by risky subprime home loans.
Not only will that further tighten lending standards, but it is sure to rattle the large banks that supplied much of that debt. It will also hurt pension and mutual funds and other institutions that own those investments through securities issued as collateralized debt obligations.
Of course, such a turn of events shouldn't come as a surprise. Low interest rates and a global liquidity deluge made cheap borrowing a gluttonous affair, largely allowing anyone who needed financing - for homes, cars, corporate takeovers and more - to borrow with ease.
Today's environment isn't all doom and gloom yet, and there are few signs that we are descending into an economy-wide credit crunch. But certainly the party-like atmosphere is gone. Debt is quickly becoming more expensive, and everyone who wants access to it will feel that pinch.
That's why the institutional loan traders cited in the S&P report sized up the current state of their market as a meltdown. The reference came as S&P reported that a composite index tracking a group of loans - considered to be the most liquid names in the market - fell to its lowest point in four years.
Those looking to raise money to finance the recent private-equity deals are getting a front-row view of the turbulence. Just months ago, there were more than enough eager buyers of the bonds and loans sold to support highly leveraged takeovers. But now investors are pushing back, demanding higher rates and protections from potential risk.
In some cases, investors are asking for so much that the bond offerings never even make it to market. ServiceMaster Co.'s underwriters called off a $1.15 billion sale of junk bonds earlier this month after investors balked at provisions in the bonds that would have let the company cover some of its interest expense by issuing more debt.
That forced the lawn-care and pest-control company to obtain a bridge loan - which provides short-term financing before long-term debt financing is secured - directly from the underwriters. A $2.85 billion loan issue still needs to get done as part of the $5.5 billion takeover by private-equity firm Clayton, Dubilier & Rice and others, according to KDP Investment Advisors Inc.
In the case of Tribune Co., the media conglomerate is feeling the heat from its lenders, who want better terms, and stock investors, who seem to be betting its takeover by real estate tycoon Sam Zell might not get done.
The Chicago-based company had to make some concessions to raise $7 billion of new debt. It agreed to repay $1.5 billion of that amount in 24 months, not the seven years it originally proposed. That will put a significant burden on the company after the takeover by real estate tycoon Sam Zell, according to CreditSights analyst Jake Newman, who calls the situation at Tribune extreme leverage.
Tribune, which still needs to raise $4.2 billion in a second round of debt financing, will use most of the money it raises this year to repurchase 126 million of its shares for $34 each and refinance bank debt as part of the takeover.
Tribune's stock investors appear worried about the deal's prospects, as evidenced by the 11 percent spread between the tender offer price and the $30 a share where it now trades. That's due to their nervousness about the buyout market in general as well as the decline in the company's fundamentals that could make paying for all this debt tough, Newman said.
The coming months will be very telling if this meltdown really is just that. The stinging effects are already starting to show up - and it looks like a sure bet that there will be plenty more if credit conditions worsen.