Archive RSS Feed: Wall Street Journal Deal Journal
It’s Official: Bankruptcy Is Back!
The Buffet of options available to distressed-debt investors is getting richer.Buffets, the restaurant-chain operator, filed for bankruptcy-law protection today, after missing a bond-interest payment a few weeks ago. The filing brings to 0.63% the share of loans outstanding that have defaulted this month, the highest rate in a year, according to Standard & Poor’s Leveraged Commentary & Data. (Other companies defaulting include Propex, a fabric maker, and Heartland Automotive.) It seems clear the long-expected reverting-to-the-mean in the default rate is upon us. Given that historically, default rates tend to average more in the neighborhood of 3%, these borrowers are unlikely to be the last to hit the skids, as the real-estate market sputters and consumers start to feel pinched. Companies hampered by slowing economic growth, especially those with exposure to the slumping housing sector, will be doubly cursed by their inability to tap once-easy debt markets for cash to stave off creditors. Those days are gone. Fortunately for Realogy, they aren’t forgotten. Realogy, recently taken private, today reported disappointing results that helped send down the price of its bonds to two-thirds of the face value, the kind of territory that usually gets distressed-debt investors licking their chops. But Realogy, like a number of 2006-07-vintage LBOs, secured for itself so-called pay-in-kind toggle bonds, which enable the issuer to pay its debt with more debt rather than cash when going gets tough. That could help the owner of Century 21 and Coldwell Banker hold off its creditors longer than Buffets and the others should its fortunes continue to tumble. Still, there will likely be plenty for vulture investors to feast on in the meantime.Read more : 22.01.2008 00:00:00
David Rubenstein’s Classical PE History Lesson
David Rubenstein Between fending off union protestors and Wharton School students hunting for a job, Carlyle Group co-founder David Rubenstein took the time at Friday’s Wharton Private Equity and Venture Capital conference to outline his theory of the ages of private equity, which we present, with some liberties, below. Before we begin, we might note that Rubenstein’s bright take on the future of private equity runs counter to classical mythology, in which each successive age is just a bit dimmer and grimmer than the preceding one. We can only hope he has his order right.The Bronze Age: The period when private equity was in its infancy, from the late 1970s to the RJR Nabisco buyout of 1987. We would argue that the early portion of this age was actually the Stone Age, in a financial sense. Ugh, me use debt, make company go better.The Silver Age: The late 1990s, before the technology bubble burst, when buyout and venture-capital firms alike enjoyed a renaissance.The Golden Age: The period from 2002 or 2003 until July 2007, when private-equity firms ruled the earth.The Purgatory Age: That would be right now.The Platinum Age: Private equity will emerge even stronger from its current trial of fire, just as it has from all previous economic meltdowns, says Rubenstein.Rubenstein didn’t say what comes after the platinum age–perhaps the diamond age? Or just old age? Or maybe he is banking on one of platinum’s best qualities–resistance to corrosion–to make it the final age of private equity.–Daniel Hausmann is a reporter and Jennifer Rossa is editor at Private Equity Analyst, a Dow Jones & Co. publication and a contributor to Deal Journal.Read more : 22.01.2008 00:00:00
Wachovia’s Golden West Deal Turns to Bronze
Depending on how you look at it, it was either one of the best- or the worst-timed M&A deals of all time. We are talking about Wachovia’s $24 billion acquisition of California mortgage lender Golden West Financial. The deal was announced in early May 2006. Its close, five months later, coincided almost perfectly with the peak in the US home-lending market, a fact made all-to-clear by Wachovia’s 98% fourth-quarter earnings decline, announced today. The woes that have halved the share price of its larger rival, Citigroup, have diverted attention away from the dismal performance of Wachovia’s stock. But of the four largest US banks - Citi, J.P. Morgan Chase, BofA and Wachovia - only Citigroup’s stock has performed worse than has Wachovia’s since the Golden West deal closed. The 44% decline in Wachovia’s stock since then has knocked nearly $50 billion off its market cap.Wachovia chief Ken Thompson seems to have had the risks of the deal on his mind when it was announced. The news release from the time quotes him as saying: 'For four decades, Golden West has taken industry-wide challenges in stride and maintained a singular focus as a risk-averse residential mortgage portfolio lender. The result is...virtually no credit losses realized even in the toughest year in its history.” That boast will likely have to be abandoned after Wachovia reported a $1.5 billion provision for credit losses, which 'largely reflected the recent significant deterioration in the residential housing market and the related portions of the commercial real estate portfolio.” But on Wall Street, of course, someone’s loss is always another’s gain. In this case, Herbert and Marion Sandler must be congratulated not only for building Golden West into a financial colossus, but for their impeccable timing in selling it. The deal valued the husband-and-wife team’s stakes at $2.4 billion. But alas, they remain big Wachovia shareholders.Book mark Deal Journal. Click here for the URL (no subscription needed).Read more : 22.01.2008 00:00:00
M&A Crash Course: Deals to Watch
Uncertainty is the enemy of deal-making, and the market is nothing if not uncertain right now. With new deal activity likely at a complete halt at least until some of the fog lifts, the market will focus on those acquisitions that are winding their way from agreement to completion. Here is a primer on the most important ones to watch, deals whose fate might help determine how bleak a year 2008 shapes up to be for deal makers.Harrah’s Entertainment. Harrah’s stock investors exhibit little doubt that the deal will be completed as scheduled next week. Credit investors are becoming equally certain that the loans and bonds that were to be sold to them to fund the deal will instead sit on the books of Bank of America and Deutsche Bank, at least for now. BCE. The biggest of all pending leveraged buyouts, a $33 billion deal, now sports a gaping spread - the difference between the deal price and the share price - of more than $9. (The buyout price is $42.75; the stock trades at $33.48.) Should this one fall apart, it would set an ominous tone for other deals in the works, like Clear Channel. Clear Channel Communications. Speaking of which, there is little doubt that the buyers - Thomas H. Lee Partners and Bain Capital - wouldn’t agree to anything close to the $39.20-a-share price for the radio broadcaster now. The question now is how strong their buyers’ remorse is, and whether they can do anything about it. People close to the deal insist it is on track, but of course they will continue to say that until just before it no longer is. And they have a lot of time to change their tune: the deal may not close for another two months. Meantime, the spread has reached nearly $8.Alliance Data Systems. Blackstone’s enthusiasm for the buyout of the transaction processor cannot be increasing along with talk of potential recession. Sure, its ability to walk away is constrained by the tight merger-contract language. But should cracks in ADS’ business appear before regulatory approval is finally secured, don’t be shocked to see the buyout firm do everything in its power to cancel this transaction. It wouldn’t shock the merger-arbitrage investors who have opened a deal spread of more than $20. Countrywide Financial. It has been less than two weeks since Bank of America agreed to buy the struggling mortgage lender. Countrywide’s depressed share price, at a discount to the deal price of some 25%, indicates it is anything but a slam dunk to get completed. Should BofA walk, will other banks be eager to take up the mantel of M&A white knight? Private-Equity Fund-Raising. Private-equity fund-raising has stayed remarkably buoyant through the market turmoil, the latest evidence being the $18 billion war chest TPG plans to raise. But the coffers of private-equity limited partners aren’t immune to broader market forces. Should they turn that spigot off, the last remaining bright spot for private-equity firms would disappear. Maybe that is why Blackstone’s stock is a mere teenager, seven months after debuting at a more mature $31 a share.Read more : 22.01.2008 00:00:00
Private Equity and the Paralysis of Cash
While Wall Street suffers from a credit pinch, does private equity have the opposite problem: too much money?Last year, PE firms raised a record $300 billion-plus of fresh cash. But where and how to put that money to work? It may appear to be a nice problem to have, but nonetheless it has caused PE folks a lot of lost sleep. On the surface, things may seem to be moving in a favorable direction: falling stocks mean assets are cheaper. Interest rates are heading south. Still, market participants say they don’t expect to see anytime soon the kinds of megabuyouts that marked 2006 and early 2007. A big reason for that is that banks still are sorting through $158 billion logjam of leveraged loans used to finance those big deals, as this Wall Street Journal article reports. Banks are unlikely to open their wallets again before that hangover ends. Even the most recent rate cut will likely provide little help, said an executive at a large buyout firm, as lower core interest rates don’t really help the spread and structure issues that are clogging the big banks’ balance sheets. The rate cuts will likely help with longer-term economic recovery, but won’t be a quick fix to the current credit problems. So, PE firms will have to get more creative in order to get deals done. 'Rather than ask what size of deals are we going to see this year,” said the executive, '[a better question is] what kind of deals we are going to see and why.” One trend is to go down the market. A person close to a New York LBO powerhouse said the firm’s professionals are screening deals they would have had passed over as too small before the credit crunch hit. Two of this year’s few buyouts: Blackstone Group’s deal for food distributor Performance Food and Bain Capital’s acquisition of child-care provider Bright Horizons – both valued at $1.3 billion – would have very likely fallen under those firms’ radar before the credit crunch.Another solution is to do more 'structured” deals, such as KKR’s recent investment in Legg Mason’s nonvoting convertible senior notes. All-equity investments are back in vogue, such as TPG’s $425 million purchase of a majority stake in Midwest Air Group Inc. Others are investing up and down companies’ capital structure, in tranches ranging from equity to distressed debt.Finally, firms may choose to simply sit on the sidelines and not do deals at all. There are precedents for this. In the 2001 recession, Thoma Cressey Bravo, a middle-market buyout shop, for instance, went 18 months without doing a single deal. Indeed, timing is very important amid increasing fears the economy may be heading into recession. Corporate earnings growith is expected to slow, making potential buyout targets less able to serve debt. 'Firms are evaluating when they are going to buy, as well as what they are going to buy,” said the buyout executive.Read more : 23.01.2008 00:00:00
LTCM 2.0: Should Wall Street Bail Out the Bond Insurers?
Is it time for Wall Street banks to stage a rescue for the troubled bond insurers Ambac and MBIA?Credit Suisse Group is officially looking for a buyer–among other 'strategic alternatives” - for Ambac. It isn’t the only one: New York State insurance regulator Eric Dinallo said he would try to bail out Ambac and its rival, MBIA, by talking to 'other parties about possible future capital investments” in the insurers. (MBIA, you may remember, already sold a $1 billion stake to private-equity firm Warburg Pincus, which has staunchly said it won’t sell). If Ambac – or MBIA – fail, it could be another blow to Wall Street’s investment banks, who are the biggest underwriters of municipal bonds. Ambac has insured $38 billion of debt linked to subprime mortgages and still has exposure to $45 billion related to other kinds mortgages. And when Wall Street sells credit-default swaps that take bets on which companies will default on their debt, the bond insurers are the ones that help the banks hedge their bets. While it is impossible to quantify just how badly the banks would be hit if Ambac failed, there is no question the damage could be in the tens of billions of dollars, as banks write-down the value of their existing bond books, while taking extra reserves in their capital against the lower-rated paper. The ratings providers have said Ambac needs about $1 billion– roughly divided among the 15 banks approached for the M-LEC, that would only be about $66 million each. Of course, there are a host of other contingencies in play, but as a general concept, it sure beats a write-down. So wouldn’t it make sense for those banks to save the bond insurers before they too are sucked into the vortex? There certainly is precedent for the idea.Jamie Dimon barely bit down his resentment at being drafted into the ill-fated M-LEC that was meant to save all those struggling SIVs. And let us not forget about Long Term Capital Management, the hedge fund that lost $4.6 billion in a little more than a single quarter in 1998. The Federal Reserve pulled together 14 investment banks – only Bear Stearns begged off – for a $3.6 billion capital infusion that saved LTCM and kept it going until at least 2000.Of course, many of the banks already have full plates right now. Citigroup just raised nearly $30 billion dollars to get back to a healthy Tier-1 capital ratio, and Merrill Lynch’s stake sales have put the bank on $80 billion of cash and liquidity. Bank of America is up to its eyes in Countrywide Financial, and J.P. Morgan Chase, while on the hunt, probably isn’t eager to get into the bond-insurance business. Considering how big a hit the banks could take if the bond insurers fail, though, it might be a smart idea to move a bailout of the bond insurers up on the agenda.–Heidi Moore is US Bureau Chief of Financial News, a Dow Jones & Co. publication and a contributor to Deal Journal.Read more : 23.01.2008 00:00:00
I’m Eric Dinallo. I’m Here to Save the World
New York State Insurance Superintendent Eric Dinallo (below) sure works fast: only days after announcing plans to find investors to save struggling bond insurers like Ambac and MBIA, Dinallo already is holding meetings about how such a plan would work. Success in creating the financial detente necessary to rescue the bond insurers would be in marked counterpoint to the modus operandi of his old boss, mentor and former state attorney general, Eliot Spitzer, who always seemed more inclined to jail executives than save their companies.If Dinallo’s plan works, it wouldn’t be the first time he has stepped in to save a troubled financial institution. Dinallo worked for Spitzer from 1999 and 2003 - as head of the AG office’s his investor protection bureau and the main point man on Spitzer’s investigations of Wall Street research, late trading and market timing and insurance industry kickbacks. In 2002 Dinallo gained recognitions among regulators (and the bankers who dreaded them) for the Dinallo Affidavit, the blow-by-blow account of Wall Street research violations, including those of former Merrill Lynch analyst Henry Blodget. In 2003, then-Morgan Stanley general counsel Donald Kempf hired Dinallo as the firm’s chief regulatory officer to clean up the firm’s compliance process and fend off future Spitzerian investigations. By 2006, with that task completed and both Kempf and his boss, Phil Purcell, gone from Morgan Stanley, Dinallo became general counsel for insurer Willis Group Holdings - a Morgan Stanley client and recovering former target of Spitzer’s insurance investigations. Willis already had settled with Spitzer through a $51 million restitution payment to clients. A person close to a major bond insurer tells Deal Journal that a bailout - or even widespread sales of the bond insurers - would meet with eager interest from private-equity firms looking for undervalued assets and banks with enough enlightened self-interest to prevent a total collapse. Let us hope so, because if Dinallo’s plan doesn’t work, Wall Street sure wouldn’t want Spitzer to step back in. –Heidi Moore is US Bureau Chief of Financial News, a Dow Jones & Co. publication and a contributor to Deal Journal.Read more : 23.01.2008 00:00:00
Icahn Gets No Love From Motorola
Carl Icahn’s Motorola call keeps getting blocked. Sure, Icahn (left) scored a big victory when Oracle last week upped its offer for BEA Systems. And even when the billionaire septuagenarian loses, he often walks away with a consolation prize, like when Time Warner repurchased a bundle of stock after beating back his attack. But Motorola has dealt Icahn one setback after another.First, his effort to shake up the cellphone maker and secure for himself a seat on its board fell flat last year. His effort to convince the company to buy back stock fell on deaf ears. Now it appears that his preference for a break-up of the tech giant may go unfulfilled, too.Motorola CEO Greg Brown was asked on the company’s conference call today about a breakup. All he would say is: 'As it relates to the strategy of breaking up the Company, our focus is absolutely improving the profitability in Mobile Devices, and it is reinforcing and extending the category leadership in the other businesses. As we do that, we believe all shareholders will benefit from enhancing and driving the economic value of Motorola.” (Compare that to what Motorola finance chief Tom Meredith said last month: 'Â…there is every opportunity for us to create significant economic value, therefore drive shareholder value higher, as a whole. Does that mean, however, that other options aren’t viable options? No, not all...a change in circumstance sometimes requires a change in action.”)Brown’s words may be salt in Icahn’s wounds, coming on the day that Motorola reported an 84% decline in its fourth-quarter profit, which pushed its shares down 19%. According to FactSet Research Systems, Icahn owned more than 75 million Motorola shares as of September, bought at prices as high as $18.53. With the stock falling to $10.01 today, Icahn has lost a lot of money, even for him.Read more : 23.01.2008 00:00:00
Sallie Mae to Shareholders: 'We’re in Play. Really”
You know you’re down on your luck when you have to beg investors to believe you’re for sale. That is pretty much what Sallie Mae Chairman Anthony Terracciano (left) did in a meeting with its shareholders today, after the student lender reported a fourth-quarter loss that shaved another 11% off its beaten-down stock. Terracciano said the company has a two-pronged strategy to get back in the good graces of shareholders, who have endured a 70% dive in the stock since the J.C. Flowers & Co.-led group walked away from their $60-a-share buyout deal. The first involves meeting its performance targets, a goal Sallie has woefully failed at lately. Terracciano, who ran First Fidelity Bank when it was sold to what is now Wachovia for $5.4 billion in 1995, went on:But we also have to be be willing to recognize a good deal when it comes along and if that’s the right thing to do for the shareholder, we will do it. Now, the first time I said this, people didn’t believe me, the second time I said it, they believed me because I had already sold one, but they didn’t believe the board that I was getting involved with because they had never sold one. In this case there’s no burden of proof, okay. The board has already demonstrated it is willing to sell, and I have demonstrated I am willing to sell. That’s not an issue where we have to establish credibility. We will make sure there are two ways for the shareholder to win.(Transcript–that we cleaned up–courtesy of Thomson Financial.)Normally such strong indications that a company’s management is open to a sale would send a stock soaring. Sallie shareholders don’t appear to be biting. Maybe that is because, with the stock (at $17.10) at a low unseen in seven years, they are none-too-eager to part with the company in a fire sale. One thing is for sure: J.C. Flowers & Co. need not apply.Read more : 23.01.2008 00:00:00
Good Lord! Sallie Mae CEO Says He Is Sorry
Sallie Mae CEO Al Lord has put away his guns. It was the right thing to do, of course. But we must confess we appreciated the feistier Lord more than the mellower version.Today is the day of the student lender’s analyst meeting that Lord (left) referenced in his bizarro conference call with analysts last month. Lord said at the time that analysts should be prepared to go through a metal detector upon arriving at the meeting. The call also included a few sharp exchanges with analysts and abruptly ended with perhaps the most memorable closing line for such an event in history, when Lord said to one of his lieutenants: '...let’s get the [expletive] out of here.” Today’s meeting at the Waldorf Astoria in New York was a little less eventful. Lord called the past 100 days–which included a broken buyout deal, a big personal stock loss for Lord, an SEC probe and a dismal earnings report today–”eventful” and 'painful.” He also apologized for his prior outburst. (Unedited transcript courtesy of Thomson Financial.)DEALS ALERT • Don’t miss another deal: Click here to automatically sign up for Deals Alert emails.'...my December 18th conference call did not improve that situation. I did not answer your questions that day. We will answer them today. I recognize that day my closing comments were offensive. They frankly weren’t meant to be closing comments but for that, I apologize. And I can’t say that it is the first time I have used bad language. It’s the first time I did it in front of 500 people.”Read more : 23.01.2008 00:00:00
Also read other news from channel: Wall Street Journal Deal Journal
Related links