by Calculated Risk on 2/09/2009 10:00:00 AM

From Bloomberg: Lyondell Banks Caught in Bankruptcy Lose $3.7 Billion in Loans

The five banks that helped finance the takeover of Lyondell Chemical Co. have lost at least $3.7 billion, and that figure may climb to more than $8 billion, which would make the leveraged buyout the costliest in history for lenders.
...
The financing includes $8 billion of low-ranking loans still held by the banks that may be worthless ...

Each of the five banks [Goldman Sachs Group Inc., Citigroup Inc., UBS AG, Merrill Lynch & Co. and ABN Amro Holding NV] holds $1.6 billion of so-called second- and third-lien loans, the people familiar with the situation said.

Lyondell’s losses dwarf those from the busted LBOs of the 1980s, such as Ohio Mattress Co., the $965 million takeover dubbed “the burning bed” by bond traders.

Back in 2007, when the liquidity crisis first started, many banks were stuck with LBO related pier loans (bridge loans that they couldn't sell). Now the banks are being forced to take write downs on these loans. Or in this case, since these are second and third lien loans, complete write-offs.

by Calculated Risk on 4/09/2008 04:35:00 PM

From Dow Jones: Goldman sells $500 mln of Chrysler debt at very deep discount (hat tip barely)

Goldman Sachs placed $500 million of Chrysler Automotive's loans at a price of 63 cents Wednesday to an investor group that included hedge funds ... At such a price, the yield on the debt is more than 20%.

More write-downs coming.

by Calculated Risk on 4/08/2008 08:08:00 PM

From Financial Week: Citi may write down another $17 billion for Q1, research firm says

CreditSights estimated that Citigroup will likely report the biggest write-downs for Q1. The write-downs could range from $15.2 billion to $16.8 billion, CreditSights reckons, depending on whether valuation reserves related to financial guarantors are included in the tally....

CreditSights estimates that write-downs at Bank of America could range from $8.8 billion to $9.9 billion. At J.P. Morgan, the hit could be around $7.5 billion.

And from the WSJ: Citi Nears Sale of Leveraged Loans

Citigroup Inc. ... is close to a deal to unload about $12 billion of leveraged loans and bonds to a group of private-equity firms ...

Citigroup originally issued the debt to help finance the leveraged-buyout boom.
...
Under the planned deal, Citigroup will sell the loans and bonds to buyout firms including Apollo Management, TPG and Blackstone Group, said the people briefed on the deal. The firms are expected to pay an average price of slightly less than 90 cents on the dollar.

Just more good news.

by Calculated Risk on 3/26/2008 07:09:00 PM

From Bloomberg: Clear Channel, Bain, Lee Sue Banks Over Buyout Plan

Clear Channel Communications Inc., Bain Capital LLC and Thomas H. Lee Partners LP sued banks financing the $19.5 billion buyout of Clear Channel to force them to honor funding commitments.
...
The banks stand to lose at least $2.7 billion because loan prices have fallen since they agreed to finance the transaction last year.

The banks have about 2.7 billion reasons to find a way out of this deal.

by Calculated Risk on 3/26/2008 11:20:00 AM

From Bloomberg: Citigroup Estimates Cut by Oppenheimer's Whitney

Whitney predicted the bank will lose $1.15 a share in the quarter because of potential markdowns of $13.1 billion on assets including leveraged loans and collateralized debt obligations.

Hopefully there will be no death threats for Ms. Whitney this time.

by Calculated Risk on 3/25/2008 04:13:00 PM

From the WSJ: Clear Channel Communications' Privatization Deal Is Near Collapse

The $19 billion privatization of Clear Channel Communications Inc. was near collapse as the private equity firms behind the deal and the banks financing it failed to resolve their differences over the terms of the credit agreement ...

This is a deal no one wants - except Clear Channel's current owners.

by Calculated Risk on 3/19/2008 01:48:00 PM

From Bloomberg: Goldman, Lehman Slash Prices to Unload Backlog in Buyout Debt (hat tip mike)

Goldman Sachs ... is selling Chrysler LLC debt for less than 80 cents on the dollar ...

Goldman, Lehman Brothers Holdings Inc. and Morgan Stanley are among securities firms and banks holding $129 billion of LBO loans, down from $163 billion at the start of this year, according to Bank of America Corp. analysts ...

The article notes that some of the private equity firms are buying back some of their LBO debt. Getting these pier loans (bridge loans that went nowhere) off the balance sheet is a high priority for the investment banks and will free up capital for other investments - but this also means more write-downs this year.

by Calculated Risk on 2/25/2008 11:43:00 AM

Goldman Sachs, in a research note this morning, noted that they expect "major write-downs" in leveraged loans this quarter. They estimated leveraged debt write-downs this quarter of $1B to $2B for several firms, with write-downs at Citi of $2.2B and Merrill of $1.3B.

Update: This is just the leveraged debt write-downs. Total write-downs at Citi could be $12 Billion (see MarketWatch: More credit costs seen weighing on banks, brokers)

They also noted there will be significant write-downs for RMBS and CMBS (residential and commercial mortgage backed securities) with special concern about CMBS.

Of course Goldman doesn't cover Goldman. But others do ...

From the WSJ: Goldman's Profit Magic May Be Fading

One of the biggest worries is Goldman's large exposure to leveraged loans, which totaled $42 billion at the end of the firm's last quarter, according to analyst calculations. During the deal boom, Goldman was a huge player in financing private-equity buyouts. But investors started to avoid buyout loans last summer, causing the debt to pile up on balance sheets and their market values to drop.

The result: Goldman is in the sort of sticky situation it largely avoided with subprime mortgages. The firm's leveraged-loan exposure is equivalent to 1.1 times its net worth, versus an average of 0.7 times for U.S. brokerage firms, according to Credit Suisse analyst Susan Roth Katzke. Write-downs on leveraged loans could total as much as $1.7 billion in the current quarter, Mr. Trone estimates.

And it could be worse if one or more of the large LBO companies defaults on their debt. As the WSJ noted:

[A]larming news, like the bankruptcy filing of a company overwhelmed by its LBO-related debt, would raise the specter of more steep markdowns.

by Calculated Risk on 2/19/2008 07:30:00 PM

The WSJ Deal Journal has an interesting analysis today: Leveraged Loans: The Hangover Wasn’t Worth the Buzz

Investment banks now face around $197 billion in exposure to leveraged loans used to back big buyouts in 2007, adding inestimable stress to their efforts to extricate themselves from the credit crunch. Was it worth it?

Not really, no.

The WSJ's Heidi Moore provides some analysis for several banks. As an example, for Citigroup she writes:

Citigroup ... earned only $856 million in fees from private-equity firms in 2007, even though the bank underwrote leveraged loans totaling $114.3 billion and still holds $43 billion in exposure. Oppenheimer analyst Meredith Whitney estimates Citigroup’s leveraged loan write-downs would be about $2.5 billion ...

And this doesn't count the opportunity costs.

by Tanta on 2/15/2008 10:43:00 AM

This was a pretty amazing article in the Financial Times:

Homeowners are being advised that it would be cheaper to walk away from big mortgages than incur further losses on their household budgets, increasing the chances that more high-end real estate transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that homeowners would risk serious damage to their credit scores if they were to default on their loans.

But legal advisers argue that the future credit costs homeowners would incur in such cases would be far lower than the cash they would have to bring to closing if they sold their homes, given the current cataclysmic conditions in the housing markets.

“It is the tipping point argument,” said a senior partner at one of the biggest mortgage firms, who asked not to be named. “The borrowers have so many issues with their balance sheets that they are considering a new policy.”

Wow, that's pretty brazen. Of course it is. I made it up. This is what the FT actually says:

Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.

This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.

But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.

“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”

(Thanks, e!)

by Calculated Risk on 2/04/2008 09:54:00 AM

From Stacy-Marie Ishmael and Henny Sender at the Financial Times: Loan market in ‘disarray’ after Harrah’s upset

The leveraged loan market begins the week in “disarray” following the collapse of efforts to syndicate $14bn of the debt used to finance the $30bn buy-out of Harrah’s Entertainment, bankers say.

The group of banks backing buyers Apollo Management and Texas Pacific Group are having trouble selling on the leveraged buy-out debt to third parties. With the bulk of the debt remaining on their books, the banks are sitting on a sizeable loss.
...
Virtually every loan-backed buy-out deal done in the past few months is trading well below 90 cents on the dollar. With most investors concluding that the bottom is not yet in sight ...

“The market is in total disarray,” said the head of debt capital markets at one major Wall Street firm. Another senior banker involved in the deal added: “The last 10 days have been the worst ever. There is a complete buyers’ strike.”

When a bank makes a bridge loan for a leveraged buy-out deal, and then can't syndicate the debt, it is known as a "pier loan"; a bridge that goes nowhere. With all the discussion of bad real estate debt, it is easy to forget that Wall Street is still saddled with pier loans from the LBO frenzy of 2007.

As Yves Smith at naked capitalism comments:

In the late 1980s, bridge financing ... brought investment banks a heap of trouble. But there is no institutional memory.

by Calculated Risk on 1/28/2008 09:29:00 AM

From the WSJ: ADS Says Blackstone Deal Unlikely

Alliance Data Systems Corp. ... Blackstone ... likely won't go through with its $6.4 billion acquisition ...

... Blackstone told the data processor and marketing firm in a letter late Friday it doesn't expect the deal to get the necessary approvals from OCC and that the regulator is demanding "extraordinary measures" which "represent operational and financial burdens ... that cannot be reasonably assumed."

"Extraordinary measures" are usually doable during better times. This seems like another way to leave your lover (from Paul Simon):

You just slip out the back, Jack
Make a new plan, Stan
You don't need to be coy, Roy
Just get yourself free

by Calculated Risk on 1/14/2008 10:21:00 AM

From the NY Times: Banks to Try Chrysler Loan Sale Again (hat tip Brian)

Remember the $10 billion in financing for Chrysler that five banks were unable to place last year during the midst of the credit crunch?

... JPMorgan Chase, Citigroup and Goldman Sachs, are still trying to syndicate the loans.

... bankers have had a difficult time trying to find takers for the auto company’s debt. There have been two efforts at syndicating the loans, one in July and most recently in November ... Now, the banks will wait until conditions improve. “We will be opportunistic,” [Chad Leat, the vice chairman of capital markets origination at Citibank] said. “So far, January is not welcoming at all.”

Third time a charm?

by Calculated Risk on 1/01/2008 12:11:00 PM

From the WSJ: PHH Ends Agreement With Blackstone, GE Unit (hat tip Terry)

PHH Corp. said Tuesday it terminated its planned deal with private-equity firm Blackstone Group and a unit of General Electric Co. amid problems with the availability of debt financing needed to fund part of the transaction.
...
The ... company's industry has been hit hard by the implosion of the mortgage business at large. ... PHH says it is one of the top originators of residential mortgages in the U.S. ... Most are "prime" loans ...

Tanta is right: "We're All Subprime Now."

by Calculated Risk on 10/10/2007 11:30:00 PM

TXU closed today. From Bloomberg: TXU Closes $32 Billion Sale to Group Led by KKR, TPG

TXU Corp. completed its $32 billion sale to a group led by Kohlberg Kravis Roberts & Co. and TPG Inc. in a record buyout ...

Including assumed debt, the transaction was valued at about $45 billion, the most ever in a leveraged buyout of a U.S. company.

According to TheStreet.com, the TXU Debt Sale is Set for Monday

Citi and JPMorgan are expected to sell some $5 billion of loans to help finance the private equity group's $32 billion acquisition.

It will be interesting to see how much debt is sold on Monday, and on what terms. And also how large any pier loans will be at Citi and JPMorgan.

by Calculated Risk on 10/05/2007 09:08:00 AM

From Bloomberg: Washington Mutual Says Third-Quarter Profit Fell 75%

Washington Mutual Inc., the biggest U.S. savings and loan, said third-quarter net income fell about 75 percent because of "a weakening housing market and disruptions in the secondary market."

Loan loss provisions total about $975 million and losses and writedowns on mortgage loans and securities amount to $410 million, the Seattle-based company said in a statement today.

Added: Merrill Lynch Says Credit Market Conditions to Adversely Impact Third Quarter 2007 Results

Merrill Lynch & Co., Inc. today announced that challenging credit market conditions will have an adverse impact on its net earnings for the third quarter. The company expects to report a net loss per diluted share ... resulting from significant negative mark-to-market adjustments to its positions in two specific asset classes: collateralized debt obligations (CDOs) and sub-prime mortgages; and leveraged finance commitments.
...
The primary drivers of the FICC net losses in the third quarter were as follows:

* Write-downs of an estimated $4.5 billion, net of hedges, related to incremental third quarter market impact on the value of CDOs and sub-prime mortgages. These valuation adjustments reflect in part significant dislocations in the highest-rated tranches of these securities which were affected by an unprecedented move in credit spreads and a lack of market liquidity in these securities, which intensified during the third quarter. During the quarter, the company significantly reduced its overall exposure to these asset classes.

* Write-downs of an estimated $967 million on a gross basis, and $463 million net of related underwriting fees, related to all corporate and financial sponsor, non-investment grade lending commitments, regardless of the expected timing of funding or closing. These commitments totaled $31 billion at the end of the third quarter of 2007, a net reduction of 42% from $53 billion at the end of the second quarter. The net losses related to these commitments were limited through aggressive and effective risk management, including disciplined and selective underwriting and exposure reductions through syndication, sales and transaction restructurings.

There appears to be a line at the confessional, also from Bloomberg: JPMorgan, Bank of America May Write Down Buyout Loans

JPMorgan Chase & Co. and Bank of America Corp., the biggest arrangers of U.S. leveraged loans, may have combined markdowns of $3 billion in the third quarter ...

These possible writedowns are because of LBO related pier loans.

by Calculated Risk on 9/21/2007 02:19:00 AM

Another private equity LBO is in trouble.

From the WSJ: Harman's Suitors Sour on Buyout

The private-equity buyers of Harman International Industries Inc. are balking at completing the $8 billion purchase of the audio-equipment maker, people familiar with the matter said, as yet another leveraged buyout falls into a hostile tête-à-tête between buyer and seller.
...
Should KKR and Goldman choose to break the deal, they would have to pay a $225 million termination fee, according to corporate filings. That fee is about 2.86% of the deal's value, which is somewhat lower than other transactions of a similar size, according to an analysis by MergerMetrics.com.

Based on previous reports, the average loss on recent LBOs has been about 4% of the deal debt value, so a $225 million breakup fee is might be a bargain depending on the percentage debt. Whatever it takes to avoid more pier loans!

As an aside, the Harman business has recently underperformed expectations, probably as a direct result of the housing bust.

by Tanta on 9/18/2007 07:38:00 AM

Bloomberg reports:

MT. LAUREL, N.J. - PHH Corp., the mortgage lender that agreed to be bought by General Electric Co. and Blackstone Group LP, said the $1.8 billion sale could unravel as lenders back away from some leveraged buyouts.

JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. told Blackstone they might fall $750 million short in funding its part of the deal, PHH said Monday. GE, which plans to keep the company's vehicle-leasing unit, might pull out if Blackstone can't get financing. . . .

PHH is the second company in a week to warn that an LBO could be derailed as banks seek to renege on lending commitments for smaller buyouts while sticking with big deals such as Kohlberg Kravis Roberts & Co.'s $26 billion takeover of First Data Corp. Reddy Ice Holdings Inc. said last week that Morgan Stanley might back out of selling debt for GSO Capital Partners LP's purchase of the company.

"There will be some deals that won't get done, but it won't be the big names," said billionaire financier Wilbur Ross, whose New York-based WL Ross & Co. invests in distressed companies. "Some of the smaller deals have better escape hatches." . . .

"We continue to hope that Blackstone will succeed in arranging its financing so the merger can be completed," said Stephen White, a spokesman for Fairfield, Conn.-based GE. "But if Blackstone is unable to complete its purchase, GE will not be obligated to complete the merger."

In March, GE agreed to buy PHH and resell the mortgage unit to New York-based Blackstone, manager of the biggest buyout fund. PHH said Monday it told GE that it expects the company to "fulfill its obligations under the merger agreement."

In case you happen to be curious about it, PHH was once an independent company that got sucked into the Cendant conglomeration of "affiliated businesses," mixing mortgages and real estate sales and all kinds of other stuff. Then after the spectacular accounting fraud at Cendant, PHH got "spun back" to being an independent company, until GE saw a flip an investment opportunity early in the year.

PHH is a big mortgage originator, although you might not realize that because a huge chunk of its business is "private label outsourcing" of one kind or another. Lots of smaller banks and credit unions, for instance, and a few larger financial firms like AmEx use PHH to originate and service loans under a "private label" arrangement that is opaque to the consumer. PHH will, for instance, issue a separate phone number to Little Dog Bank's "mortgage department," which will be given to Little Dog's customers. When they call, the PHH reps answer "Little Dog Bank, how may I help you?" or words to that effect. So a lot of what goes on that looks like "retail" lending is actually running through PHH's fee-for-service outsourcing operations. So is a lot of "direct lending," insofar as PHH's private label clients offer their own customers a "loan by phone" option that involves calling PHH-in-drag. There can be loans brokered to Little Dog that are really closed by PHH pretending to be Little Dog Wholesale. You would need Visio more than you would need Excel.

The whole point of this, besides making it less expensive for a Little Dog or a financial services company like AmEx that doesn't primarily originate mortgages to "originate" mortgages, is the "branding" part, which involves either "seamless customer service" or "endless opportunities to sell you more stuff," depending on which PR you are reading. For a lot of outfits, the mortgage loan itself isn't the "profit center": it's the other accounts or insurance policies or what have you that can be "cross-sold" to people with mortgage loans. Alternately, the ability to offer these "private label" mortgages is a way to hang onto depositors or other account-holders who want all their accounts, including their mortgage, at one place. Of course they aren't all at one place; they look like they're all at one place. Which is why putting it all at GE, which once apparently made lightbulbs and has been in and out of the mortgage business more times than the set changes at Phantom of the Opera, makes perfect sense. If only the credit markets saw it that way.