The shorts will be out in force at COF

Coventree (COF:TSX) couldn’t land any buyers last night, so the capital need has grown to $1.6 billion in the space of just three days — against total conduit assets of about $15.5 billion according to the June 30th balance sheet release of earlier this week.

Whoever covered their shorts yesterday, driving the stock up nicely, will be back selling again this morning.

In related news, KKR affiliate KKR Financial (KPE:NYSE) sought to delay US$5 billion of short term funding it had received via the commerical paper market (an excerpt):

“KKR Financial, which is 12 pct owned by KKR, said yesterday it recently sold 5.1 bln usd of mortgage loans at a loss of 40 mln usd, and may lose as much as 200 mln usd more on its investment in its two issuers of commercial paper. It said it could also face an additional 50 mln usd in unspecified ‘liabilities.’

The KKR commercial-paper issuers, KKR Atlantic Funding Trust and KKR Pacific Funding Trust, asked to delay the repayment and extend the notes’ maturity for up to six months, citing ‘the unprecedented disruption in the residential mortgage and global commercial-paper markets’.

The two issuers raised money with 500 mln usd in equity backing from KKR Financial and invested in mortgage securities based on a debt-to-equity ratio of about 20-to-1, said the people familiar with the situation. Such mortgages might fetch only 90 pct or less of their face value now, these people said.”

And Countrywide Financial (CFC:NYSE) drew down their entire US$11.5 billion bank line to “bolster” their balance sheet. How happy were their 40 banks to get that telephone call (see post “A smile a Country-wide” August 3-07?

If KKR and Countrywide are hurting, how well can the small fish fare? This is the time to use the old adage about the frog that sat in the pot of water, while the temperature was turned up one degree at a time, slowly but surely.

UPDATE: The CDP has pulled together 2/3rds of the group of commercial paper owners married to the domestic asset backed industry according to this news story. Smart move; who wants to realize on the underlying assets of the conduit?

Doesn’t help the ultimate providers of credit advance new funds for the car leases that would have been written next week, but at least some stability to return to the firms in question, such as Coventree. Might be a win for the domestic bank-sponsorer asset backed programs. With less competition, they’ll be able to charge more to use their conduit, require higher credit cushions and more equity from the folks writing the leases and mortgages that go into these things. And since their own issuing spreads have increased from maybe BAs plus 2 to BAs plus 30 basis points over the past week, so they should.

MRM