by Calculated Risk on 11/19/2007 08:17:00 PM

From the WSJ Deal Journal, Dana Cimilluca reports: Chrysler Loan Sale Likely Postponed

The $4 billion sale of loans connected to Cerberus Capital’s August purchase of Chrysler that was to take place this week will likely be postponed, a person briefed on the matter tells Deal Journal. Orders for the paper were due today, and so far, demand has been sluggish.

by Calculated Risk on 11/14/2007 04:05:00 PM

From MarketWatch: United Rentals says Cerberus not to proceed with purchase

United Rentals Inc. said Wednesday Cerberus Capital Management LP informed the company that Cerberus is not prepared to proceed with the purchase of United Rentals on the terms agreed on July 22.

And from Bloomberg: Cerberus Seeks to Renegotiate United Rentals LBO (hat tip Brian)

Cerberus Capital Management LP is seeking to cut the price on its $4 billion agreement to buy United Rentals Inc., the largest U.S. construction-equipment rental company, people familiar with the transaction said.
...
The United Rentals deal marks the second time in less than a month that Cerberus has sought to get out of a leveraged buyout as investors balk at buying an estimated $300 billion in debt committed to LBOs. ...

``This deal was expected to close sometime this week,'' wrote Stephen Volkmann, an analyst with J.P. Morgan Securities Inc. in New York. ``The banks were struggling with selling the associated debt offering.''

The banks still can't sell the debt for these LBOs, and they can't afford anymore pier loans (bridge loans that go nowhere and stay on the IBs balance sheet).

And here is a great quote from Bloomberg (no link yet): Hands Says LBO Bankers Whimpering `in Their Baskets'

``Bankers are like dogs,'' said Hands, the chief executive officer of London-based Terra Firma Capital Partners Ltd., at the industry's SuperInvestor conference in Paris today. ``They hunt in a pack and go into a feeding frenzy. When hit, they whimper, and hide in their baskets. The bankers have been hit very hard, and they're not going to come out of their baskets.''

by Calculated Risk on 11/05/2007 12:23:00 AM

From Vikas Bajaj at the NY Times: Bankers’ Lesson From Mortgage Mess: Sell, Don’t Hold

Bankers on Wall Street frequently describe themselves as being in the moving and not the storage business. They make money by trading stocks and bonds, not by owning them.

In the last week, top executives at two of the world’s largest banks, Citigroup and Merrill Lynch, have come under scrutiny for ignoring that fundamental principle.

Bajaj goes on to describe how Merrill and Citigroup kept many CDOs on their balance sheets, waiting for better prices.

“A lot of us were scratching our heads wondering ‘Where did these bonds go,’” said a banker at a rival institution who was not authorized to speak publicly.

“They just sat on them, putting them here or there on the balance sheet. They thought they were going to be O.K.”

The banks didn't realize there was a systemic problem not captured by their historical models - falling house prices - and diversification doesn't reduce this risk.

C.D.O.’s were created on the premise that managers could lower the risks of default by investing in loans made by different companies and dispersed across the country. The notion that one could lower risk by diversifying, and including a small reserve of cash, was supported by historical patterns and allowed the bonds issued by C.D.O.’s to earn higher ratings than the bonds they owned, said Mark Adelson, an independent analyst and consultant.
...
“The notion that you could be really diversified because some of your production had an Option One name and some had the New Century name and some had the Ameriquest name seems absurd,” he said referring to mortgage companies that specialized in risky home loans.

This brings us back to the key sentence in Citi's Press Release: Citi's Sub-Prime Related Exposure in Securities and Banking

... fair value of these super senior exposures is based on estimates about, among other things, future housing prices ...

Perhaps Citi should release their forecast for house prices so we can see if the $8B to $11B writedown is sufficient.

Also note that many of the IBs (especially Citi) might be making a similar mistake - being in the "storage business" - by keeping the LBO related pier loans on their balance sheets while waiting for better prices.

by Calculated Risk on 11/02/2007 10:44:00 AM

From The Economist: Chrysler: That shrinking feeling

WHEN private equity and America’s ailing car industry meet there is only one likely outcome. On Thursday November 1st, just days after hourly workers narrowly ratified a new contract, Chrysler announced plans to drop four slow-selling models, slash overall production and trim perhaps some 12,000 hourly and salaried jobs. The job cuts amount to as much as 15% of the carmaker's total workforce.
...
Whether the latest round of cuts is enough to stabilise Chrysler is uncertain. Not only is its market contracting but Chrysler has also failed to score any significant hits with its recent new products other than with a four-door version of the small Wrangler SUV. If anything the carmaker will have to eliminate even more products, if sales don’t pick up. That, in turn could lead to still more job cuts in the future. And so the cycle is set to continue.

Chrysler's future is clearly uncertain, but not mentioned in the article are the $10 Billion in pier loans (bridge loans that couldn't be sold) sitting on the balance sheets of Goldman Sachs, Bear Stearns, Morgan Stanley and Citigroup. If Chrysler defaults, the pain will be significant.

by Calculated Risk on 10/22/2007 10:44:00 AM

From MarketWatch: KKR, Goldman cancel Harman deal, to invest $400 mln

[KKR] and Goldman Sachs will cancel their $8 billion takeover for Harman International but invest $400 million in convertible notes ... KKR and Goldman won't be sued and won't have to pay a termination fee under the agreement struck.

A pretty clean exit for KKR and Goldman. No pier loans here.

by Calculated Risk on 10/16/2007 03:39:00 PM

From Bloomberg: KKR Bankers Sell $2.2 Billion of First Data Bonds

Banks for Kohlberg Kravis Roberts & Co. sold $2.2 billion of First Data Corp. notes ...

The eight-year, 9.875 percent senior securities priced to yield 10.875 percent, according to data compiled by Bloomberg. The offering leaves banks led by Citigroup Inc. and Credit Suisse Group with $10.4 billion of debt on their books from Greenwood Village, Colorado-based First Data.

by Calculated Risk on 10/12/2007 10:33:00 PM

Here is more on the Citi SIV bailout plan from the WSJ: Big Banks Push $100 Billion Plan To Avert Crunch

The plan could be announced on Monday:

If the banks agree, the plan could be announced as early as Monday, people familiar with the matter said. Citigroup announces third-quarter earnings Monday. The tentative name for the fund is Master-Liquidity Enhancement Conduit, or M-LEC.

Some banks aren't happy with the plan (does this mean Treasury is trying to strong arm other banks into participating?):

The plan is encountering resistance from some big banks. They argue that Citigroup is asking others to help bail out its affiliates and an industry-wide bailout isn't needed.

Some banks are just eyeing the fees:

Two banks in the discussions with Citigroup, Bank of America Corp. and J.P. Morgan Chase & Co., would participate not because they have SIVs -- they don't -- but because they would earn fees for helping arrange the superconduit, according to people briefed on the discussions. The superconduit's debt would be fully backed by participating banks, they said.

The timing is interesting since Citi and JPMorgan are expected to sell some $5 billion of loans on Monday to help finance the TXU LBO.

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 10/01/2007 10:16:00 AM

From MarketWatch: Big write-downs to slash Citi's quarterly net 60% (hat tip Lyle)

Citigroup Inc said Monday it expects ... huge write-downs for unsold debt it issued to finance corporate takeovers and for big losses on the value of subprime mortgage-backed securities.
...
The decline "was driven primarily by weak performance in fixed-income credit-market activities, write-downs in leveraged loan commitments, and increases in consumer-credit costs," Chairman and Chief Executive Charles Prince said in a statement.

Earlier Monday, Swiss banking giant UBS said it will take a hit of 4 billion Swiss francs ($3.4 billion) in the third quarter from its subprime mortgage exposure and plans sweeping management changes and job cuts at its investment-banking division.

Citi sees a write-down of $1.4 billion pretax, net of underwriting fees, on funded and unfunded loans for clients doing leveraged buyouts.
...
Citi also cut the value of its mortgage-related positions, as rival Wall Street investment banks did last month.

It said it expects losses of $1.3 billion pretax, net of hedges, on the value of subprime mortgage-backed securities warehoused for certain securitizations, and $600 million pretax in fixed-income credit trading due to significant market volatility and the disruption of historical pricing relationships.

I guess the music has stopped.

“As long as the music is playing, you’ve got to get up and dance. When the music stops, in terms of liquidity, things will be complicated.”
Chairman and Chief Executive Charles Prince, July 2007

by Calculated Risk on 9/27/2007 10:21:00 PM

From the WSJ: Bond Market Starts Showing Relief Signals

... Wall Street investment banks yesterday sold investors $9.4 billion in risky bank loans issued by First Data Corp. to finance its leveraged buyout.

It was the largest sale of leveraged loans since that of HCA Inc. last year. It was also nearly double the $5 billion in loans the banks said they were attempting to sell.

Still, the underwriters, which include Credit Suisse and Citigroup Inc., hold on their own books the bulk of the $24 billion in loan financing they provided for First Data.

Selling loans for 96 cents on the dollar is considered good news in this environment. Maybe Credit Suisse and Citigroup can sell more, and make up the loss with volume!

The key number is the $14 billion or so in pier loans. The total deal value was $26 billion with $24 billion in debt. This is still larger than the Chrysler pier loans that were only $10 Billion.

by Calculated Risk on 9/26/2007 04:58:00 PM

From MarketWatch: Sallie Mae says deal to buy lender threatened

The group of investors that agreed to buy SLM Corp. has said that it can't close the deal under the agreed-upon terms, the giant student lender announced Wednesday.

SLM, commonly known as Sallie Mae said that the group "has no contractual basis to repudiate its obligations" under the agreement, and pledged to pursue "all remedies available" to get the deal done.

The NY Times had an article on the Sallie Mae deal last week: Deal to Buy Sallie Mae in Jeopardy

While the group is hoping to renegotiate the price of Sallie Mae, these people said, it may also be willing to walk away and pay the $900 million breakup fee.

The $900 million breakup fee is a little higher than the reported percentage writedowns at Lehman and Morgan Stanley. The total deal value is $25 Billion.

by Calculated Risk on 9/21/2007 04:25:00 PM

WSJ: Harman Says Buyout Scuttled

Harman International Industries Inc. learned this afternoon that Kohlberg Kravis Roberts & Co. and Goldman Sachs Group's GS Capital Partners VI Fund LP don't intend to complete their $8 billion buyout of Harman.
...
Harman said the private-equity companies informed [Harman] that they believe there was a "material adverse change" in Harman's business and that Harman breached the merger agreement.

Harman disagrees ...

The breakup fee is $225 Million. Perhaps that is why KKR is arguing Harman breached the merger agreement - to avoid, or at least negotiate, the fee.

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 Calculated Risk on 9/20/2007 12:47:00 AM

From the NY Times: Deal to Buy Sallie Mae in Jeopardy

The consortium that had agreed to buy Sallie Mae for $25 billion plans to return to the negotiating table and seek a lower price ...

The buyers — the private equity firms J. C. Flowers & Company and Friedman Fleischer & Lowe, as well as two banks, JPMorgan Chase and Bank of America — met Tuesday to discuss the best way to pressure Sallie Mae into accepting a lower price, these people said.

While the group is hoping to renegotiate the price of Sallie Mae, these people said, it may also be willing to walk away and pay the $900 million breakup fee.

The $900 million breakup fee is a little higher than the reported percentage writedowns at Lehman and Morgan Stanley. If unsuccessful, this would be the largest deal to fall apart so far in this cycle.

by Calculated Risk on 9/19/2007 02:16:00 PM

From Bloomberg: PHH Sale to GE, Blackstone May Collapse as Banks Balk

PHH Corp., the New Jersey-based mortgage lender that agreed to be bought by General Electric Co. and Blackstone Group LP, said the $1.8 billion sale may unravel as lenders back away from some leveraged buyouts.

JPMorgan Chase & Co. and Lehman Brothers Holdings Inc. told Blackstone they may fall $750 million short in funding its part of the deal ...

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

Other deals in trouble include Genesco and Reddy Ice.. The banks are balking as they report write downs from the LBO loans - and try to avoid more pier loans on their balance sheets. See the WSJ: Fuzzy LBO Math

The [Morgan Stanley]’s finance chief, David Sidwell, told Bloomberg in an interview that net of fees, Morgan Stanley had $726 million of markdowns on $31 billion of leveraged-loan commitments.

Lehman Brothers Holdings said Tuesday on a conference call that it had “more than” $1 billion of paper losses on $27 billion of such commitments.

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.

by Calculated Risk on 9/14/2007 07:27:00 PM

From the Dow Jones: Morgan Stanley Doesn't Like Revised Reddy Ice Deal (hat tip idoc)

Reddy Ice Holdings Inc.'s (FRZ) path to completing its $1.1 billion buyout by GSO Capital Partners LP looks rocky, after the company revealed in a filing that Morgan Stanley, the bank that has agreed to provide financing for the deal, disagrees with amended terms of its merger agreement.

This deal is small compared to many of the other deals in the pipeline, but I think it shows the investment banks are looking for any reason to exit from these LBO deals. I'm not sure Morgan Stanley is objecting to the amended terms - the amendments do not appear detrimental to Morgan Stanley - instead they appear to be arguing that the deal is off simply because they didn't consent to the amended terms. Here is the Reddy Ice SEC Schedule 14A:

Following the execution of the amendment to the merger agreement, GSO informed Morgan Stanley that the amendment had been executed. Morgan Stanley then informed GSO that Morgan Stanley believed that by entering into the amendment without Morgan Stanley's consent, the Buyers had disabled themselves from satisfying certain conditions to Morgan Stanley's commitment to provide the debt financing pursuant to the debt financing commitment letters, and, furthermore, that Morgan Stanley was reserving its rights with respect thereto. In response, GSO reiterated its position to Morgan Stanley—that Morgan Stanley's consent was not required in order to enter into the amendment, and that the Buyers had not disabled themselves in any manner from satisfying all of the conditions to Morgan Stanley's commitment. GSO promptly notified the Company of Morgan Stanley's position and GSO's response to Morgan Stanley.

More work for the lawyers.

by Calculated Risk on 9/14/2007 04:36:00 PM

More on potential 'pier loans' ... (bridge loans by investment banks that stay on the balance sheet, aka 'bridges to nowhere').

From Bloomberg: First Data Bankers Reduce Buyout Loan, Offer Discount

Kohlberg Kravis Roberts & Co.'s bankers, struggling to find investors to finance the purchase of First Data Corp., reduced the loan sale to $5 billion and are offering the debt at a discount...

Credit Suisse, which is leading the financing, will meet with investors Sept. 17 to seek buyers for a seven-year loan at 96 cents on the dollar ... The loans will be offered at 2.75 percentage points more than the London interbank offered rate. Credit Suisse is also offering to lend some investors money to help them buy the debt ...
...
``It's a good sign that they were able to agree to a package to bring to investors,'' said Robert L. Lee, the analyst who covers First Data for KDP Investment Advisors Inc. in Montpelier, Vermont. ``It sounds like the terms are firm.''

Even if this goes through, the banks will still be stuck with substantial pier loans. The total financing consists of $16 billion in loans and another $8 billion of junk bonds.

by Calculated Risk on 9/14/2007 04:07:00 PM

Some background: back in June, Finish Line agreed to acquire Genesco for $1.5 Billion. See: Finish Line to acquire Genesco for $1.5 billion in cash

From Finish Line: Finish Line Receives Letters from UBS Regarding Genesco Transaction (hat tip Brian)

In its September 11, 2007 letter, UBS states, among other things,

"We hereby notify you that we reserve all rights with respect to our obligation to complete the financings as outlined under the commitment letter. While we will continue to pursue this matter in good faith, we are extremely concerned about the apparent deteriorating financial position of [Genesco]. We are continuing to actively monitor this situation, and look forward to your continued cooperation."

In reviewing its concerns regarding Genesco's financial performance, UBS states, among other things, in its September 13, 2007 letter that:

"[O]ur agreement to perform under the Commitment Letter may be terminated if a Material Adverse Effect has occurred with respect to Genesco. As of today, we are not yet satisfied that Genesco has not experienced a Material Adverse Effect."

This is one way to avoid a pier loan.