by Calculated Risk on 4/28/2009 12:23:00 PM

From the NY Times: Deal Is Set on Chrysler Debt That May Avert Bankruptcy

The Treasury Department has worked out a preliminary agreement with Chrysler’s largest secured creditors ...

Chrysler has about $6.9 billion in secured debt owned by big banks such as Citigroup and JPMorgan Chase and a group of hedge funds. Under the proposal, all of the debt would be canceled in exchange for $2 billion in cash...

The initial Treasury offer was $1.0 billion, and the banks countered at $4.5 billion and 40% equity in the new Chrysler. These is no mention of equity in the story.

by Calculated Risk on 4/22/2009 11:16:00 PM

I'm surprised this is playing out in public ...

First the government offered $1.0 billion, and no equity interest in the new Chrysler, to a consortium of debtholders (mostly banks with pier loans: JPMorgan Chase, Goldman Sachs, Morgan Stanley and Citigroup).

The banks countered with $4.5 billion, and a 40% equity interest.

From CNBC: Treasury Raises Offer to Chrysler Lenders

Treasury has offered the lenders $1.5 billion of first-lien debt and a 5 percent equity stake in a restructured Chrysler ...

It will be interesting to see if the banks budge (and by how much). They claim they can get more than 65 cents on the dollar in liquidation - or $4.5 billion. Just 7 more days ...

by Calculated Risk on 4/21/2009 04:13:00 PM

Pier loans: Bridge loans that couldn't be sold.

From the WSJ: Bankers Rebuff U.S. on Chrysler Debt

Chrysler owes ... lenders, which include banks such as Citigroup Inc. and J.P. Morgan Chase & Co., about $6.9 billion. But President Barack Obama and his auto team had demanded that the banks cut that to $1 billion, while gaining no equity stake in a restructured Chrysler.

In their five-page counteroffer, the lenders said they are prepared to cut Chrysler's first-lien debt by $2.4 billion, or down to about $4.5 billion, in exchange for a minority equity stake, likely to be 35% to 40% ...

The lenders have told Treasury ... they could recover at least 65% of their loans to the company if it is liquidated in bankruptcy.

Chrysler is probably worth more dead than alive - at least to these debt holders. That complicates the negotiations.

Nine days to go ...

by Calculated Risk on 4/03/2009 03:51:00 PM

UPDATE: From the WSJ: Banks Balk at Obama Demand to Cut Chrysler Debt

Banks that loaned Chrysler LLC $6.8 billion are resisting government pressure to swap $5 billion of that for stock to slash the car maker's debt, according to several people familiar with the matter ...

The lenders, which include J.P. Morgan Chase & Co., Goldman Sachs, Citigroup and Morgan Stanley ... own the rights to take control of Chrysler plants and assets, which were pledged as collateral for the loans, if the company files for bankruptcy protection.

...the Obama administration is demanding that these lenders cut their debt by $5 billion of its face value, or about 75%, said people familiar with the talks.

The banks still holding Chrysler pier loans are facing even more write-downs. (Pier loans are bridge loans that couldn't be sold and have been stuck on the bank's balance sheet). This was obvious before the Cerberus deal even closed: Chrysler's Bankers: Long Walk, Short Pier?

I'm sure Goldman is happy to have sold some of their loans at 80 cents on the dollar in early 2008.

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 10/16/2008 06:35:00 PM

From the WSJ:Lenders Eager for GM-Chrysler Deal

General Motors Corp. and Chrysler LLC are picking up the pace on merger discussions as the two sides are seeing strong support from banks and other potential lenders that are eager to see a deal done...

GM ... is aiming to get a deal done as soon as the end of October.

It sounds like the banks that still own Chrysler pier loans are pushing this deal. (Pier loans are bridge loans that couldn't be sold).

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 Calculated Risk on 2/08/2008 02:29:00 PM

From Bloomberg: Loan Losses May Spur Writedowns, Bank of America Says

Banks sitting on $160 billion of unsold leveraged loans may have to write down more losses after a plunge in the value of the debt, according to Bank of America Corp. analysts.
...
``The substantial widening in loan spreads and the lengthening in expected maturities as refinancing options dim have now threatened an unwind in leverage,'' the report said. ``A replay of last year's third-quarter bank writedowns for hung bridge exposure may be on the horizon.''

In many LBO deals, the investment banks provides a bridge loan until they can syndicate the debt. Because of the credit crunch, the banks haven't be able to sell the debt, and the bridge loans are "hung" on the banks balance sheet. Many people refer to these hung bridge loans as "pier loans"; a bridge to nowhere.

The average price for the most actively traded U.S. loans fell to 88.37 cents on the dollar this week, from 91.14 cents last month, according to S&P's LCD. Prices have fallen from 100, or face value, last June.

Although the banks have already taken write-downs on these pier loans, they probably haven't accounted for half the losses. The good news is, at least so far, the various companies acquired with LBO debt are still making their interest payments. It will really get interesting if (and when) one of these companies defaults on their debt.

by Calculated Risk on 2/06/2008 01:55:00 AM

From the WSJ: A Year of Reckoning

In a closely watched report to be released today, finance professor Edward Altman projects that high-yield, or "junk," bonds will default by a rate of 4.64% this year. That would be the highest rate since 2003 and a nine-fold increase from the 0.51% rate in 2007, which was the lowest rate since 1981. High-yield debt is typically used by lower credit-quality companies to fund operations and acquisitions.

Mr. Altman, whose so-called Altman-Z score is the market standard for predicting bankruptcy, sees as much as $53 billion in high-yield debt defaulting in 2008, up from $5.5 billion in 2007.

And in a related story from the WSJ: 'Anyone for Some Used Corporate Debt?'

The loans of First Data Corp., which was taken private in September by Kohlberg Kravis Roberts & Co. for about $28 billion, were sold into the market this past fall at a 4% discount to their par value; they now trade in the market at a steep 11.5% discount to par value, according to Reuters LPC.

Loans of Freescale Semiconductor Inc., taken private by a consortium of private-equity firms in December 2006 for about $28 billion, are trading at a 15.5% discount to their original value; Tribune Co., which was taken private in April by investor Sam Zell for $8.2 billion, issued loans now trading a 26% discount.

With rising defaults, and limited demand for leveraged loans, the banks will have difficulty syndicating all the $152 billion in LBO debt still in the pipeline.

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 1/21/2008 09:55:00 PM

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

From the WSJ: New Year, Old Problem: Buyout Debt

The banks now sit on $158 billion in leveraged loans in the U.S., which are credits with a high default risk, according to Standard & Poor's Corp. That pool includes private-equity deals valued at $88.25 billion that have been funded by the banks but not fully syndicated, according to data tracker Dealogic.

The investment banks are trying to sell the debt:

The market will get another test as a group of underwriters led by Deutsche Bank AG and Bank of America Corp. begin unloading $7.25 billion in loans related to the buyout of casino operator Harrah's Entertainment Inc. by Apollo Management LP and TPG. Last week, the banks began marketing the bonds at a discount of 96.5 cents on the dollar, for a deal widely seen as one of the most desirable credits created during the 2006 buyout boom.

It will be interesting to see if this "most desirable" of buyout debt gets sold, and at what price. Imagine the haircuts for the less desirable debt. And these pier loans also contributes to the credit crunch by limiting the amount the banks can loan to other companies.

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 12/21/2007 09:33:00 AM

From the WSJ: Chrysler Faces Financial Pinch, Sees Asset Sales

Chrysler LLC has slipped into a serious financial crunch just four months after Cerberus Capital Management LP swept in to save the auto maker.

At a meeting earlier this month, Chief Executive Robert Nardelli told employees the company is headed for a substantial loss this year and is scrambling to sell assets to raise cash ...

"Someone asked me, 'Are we bankrupt?'" Mr. Nardelli said at the meeting. "Technically, no. Operationally, yes. The only thing that keeps us from going into bankruptcy is the $10 billion investors entrusted us with."

Back in August, when the sale of Chrysler to Cerberus was closed, the investment banks were unable to sell $10 billion in debt and had to take the debt on their balance sheets. This played a role in the credit crunch in early August.

The banks, led by JPMorgan Chase, and including Goldman Sachs Group, Bear Stearns, Morgan Stanley and Citigroup, have tried several times to sell some of these loans, and each time the offering has been postponed. In November, the banks tried to sell a portion of the debt at 97 cents on the dollar and found no takers. With the news that Chrysler's financial situation is "serious", the value of these loans has probably dropped sharply.

This is reminiscent of the Burning Bed incident mentioned in the WSJ in May:

In a famous event dubbed the "Burning Bed," First Boston Corp. in 1989 made a $457 million bridge loan to the purchasers of Ohio Mattress. When the junk-bond market collapsed soon afterward, First Boston couldn't refinance the loan and ended up owning most of Ohio Mattress. Credit Suisse had to inject additional capital into First Boston, culminating in a full takeover.

Even adjusted for inflation, $457 Million is chump change compared to the Chrysler pier loans.

Note: a bridge loan is supposed to be temporary financing while the banks syndicate the debt. When the debt can't be sold, the bridge loan becomes a "pier loan" - a bridge to nowhere - and ties up the capital of the investment banks.