Pandit’s `Closer to End’ Means No Escaping LBO Loans (Update4)
Pandit’s `Closer to End’ Means No Escaping LBO Loans (Update4)
By Pierre Paulden and Cecile Gutscher
April 29 (Bloomberg) — If the credit crunch really is close to ending, as Citigroup Inc. Chief Executive Officer Vikram Pandit says, then why is he offering below-market terms to rid the bank of some of its $26 billion in leveraged buyout loans?
Citigroup sold $8 billion of the debt to private-equity firms this month only after giving buyers $6 billion of financing at cheaper rates than it can borrow itself, according to people familiar with the transaction, who declined to be identified because the terms aren’t public. Deutsche Bank AG and Royal Bank of Scotland Plc are also offering credit to buyers to help cut their holdings.
While the deals helped shrink the global overhang to $91 billion from $230 billion, don’t expect banks to open their doors to new borrowers anytime soon, said Nigel Sillis, director of fixed-income and currency research at Baring Asset Management in London. That’s because the arrangements shift one type of loan for another.
“It’s too optimistic to say the backlog has been cleared and everything is back to normal,” said Sillis, whose firm oversees $48 billion. “The forced sellers are cutting deals with the only buyers in town. Getting bona-fide lending going again is way down the line.”
$65 Billion
Banks escaped about $65 billion of LBO commitments in the past four months in part by lending money to private equity firms such Blackstone Group LP’s GSO Capital Partners and Apollo Management Inc. Wall Street is getting rid of the debt individually, in packages or placing it into structures such as collateralized loan obligations, which pool loans and slice them into pieces with various ratings to sell to investors.
“They’re substituting one credit for another but they’re still ultimately on the hook for the debt,” said Robert Willens, a former managing director Lehman Brothers Holdings Inc. who runs a tax-advisory firm in New York.
The rest of the inventory was reduced because acquisitions such as Blackstone’s $6.6 billion of Dallas-based credit card processor Alliance Data Systems Corp. were canceled, eliminating the bank commitments.
By offering to finance the sales, banks can receive higher prices for the loans.
Financing
Deutsche Bank sold loans for about 90 cents on the dollar, according to people familiar with the offering. By contrast Goldman Sachs Group Inc., which didn’t provide financing, has dumped some loans for as little as 63 cents. Goldman Sachs dropped 11 percent this year in New York Stock Exchange trading, compared with Citigroup’s 9.6 percent drop.
Financial institutions ended up with the buyout debt after agreeing to lend a record $735 billion for LBOs last year. When credit investors began fleeing in 2007 to safer bonds, the banks were left holding the debt, which is rated below Baa3 by Moody’s Investors Service and BBB- by Standard & Poor’s.
Citigroup was stuck with $69 billion of commitments to companies including Dallas-based TXU Corp., Texas’ biggest electricity provider now known as Energy Future Holdings Corp.
Pandit, 51, was put in charge of Citigroup in December. He cut the firm’s backlog in the first quarter by $5.5 billion to $37.7 billion, according to regulatory filings. It has since sold $8 billion with financing and $4 billion without, the bank said.
In some cases Citigroup provided private-equity firms with $4 of financing for every dollar of they invested, said people familiar with the terms.
Blackstone, TPG
The loans to buyout firms, including Blackstone and TPG, were offered at as low as 1.5 percent above the London interbank offered rate, or about 4.3 percent. That compares with Citigroup’s sale of preferred securities last week at a yield of 8.4 percent.
Citigroup spokeswoman Danielle Romero-Apsilos declined to comment.
The purge helped drive overall loan prices higher and enabled Pandit to tell investors last month the credit crisis is abating.
“We think it’s important to think about the credit crisis in terms of two phases,” Pandit said at the bank’s shareholder meeting this month. “During the first phase, there were meaningful liquidity and price adjustments that resulted in meaningful marks, and therefore, capital adjustments. I think we are closer to the end of this phase than the beginning.”
In the second phase, depending on housing and the economy, credit losses will increase in Citigroup’s loan portfolios, Pandit said. “We have significant earnings potential to offset them,” he said.
Loan Prices
The S&P index of actively traded loans rose to 92.1 on April 24, up from a record low of 86.28 cents in February as investors bet the reduction of the backlog would buoy prices.
While the banks remain stuck with lending commitments, the loans to private-equity firms are generally higher quality than the LBO financing, said Janet Tavakoli, president of Chicago- based Tavakoli Structured Finance, which advises banks and hedge funds. That reduces the amount of capital they are required to put up to cushion against potential losses.
Carlyle Group Chairman David Rubenstein said he’s eager to participate in the sales. Banks are offering the debt at discounts lower than the prices on their book and are willing to finance the sales, he said.
Other private equity firms are going to do it and “we’re going to do it too,” Rubenstein told a conference in Baltimore yesterday.
Deutsche Bank provided Blackstone and Apollo with loans with similar leverage to Citigroup, according to investors who saw the terms. The German bank also gave below-market rates to entice buyers, offering to lend the money at as little as Libor plus 1.25 percent, the investors said. John Ford, a Blackstone spokesman, and Steven Anreder, an Apollo spokesman, declined to comment. Blackstone and Apollo are based in New York.
Deutsche Bank Loss
Deutsche Bank Chief Financial Officer Anthony Di Iorio told analysts on a conference call today the bank sold 1.4 billion euros ($2.2 billion) of loans in April, in addition to sales earlier this year. He didn’t discuss prices or financing arrangements with buyers.
The Frankfurt-based bank reported its first quarterly loss in five years today after writing down the value of loan obligations by 1.8 billion euros. The bank reduced commitments to 33.1 billion euros from 36.2 billion euros at the end of last year. Deutsche Bank sold $5 billion of the debt to private-equity firms in the U.S., analysts at Charlotte, North Carolina-based Bank of America Corp. wrote last week.
Goldman Sachs
Goldman Sachs reduced its loans to $20 billion from $43 billion since the start of the year without providing credit to buyers, said people familiar with the trades.
The bank ditched its portion of $7 billion of financing for Auburn Hills, Michigan-based automaker Chrysler LLC for as little as 63 cents on the dollar and sold debt of Bain Capital’s Bavaria Yachtbau, a German yacht maker, for 65 cents on the dollar, the people said.
“Goldman bit the bullet, leaving no doubt about the risk transfer,” Tavakoli said. Michael DuVally, a Goldman Sachs spokesman in New York, declined comment.
Until banks can shed last year’s LBO commitments, they’ll be unable to make new loans, sacrificing the ability to earn fees that average 2.5 percent on high-yield debt, the most lucrative part of the capital markets, according to estimates by Mercer Oliver Wyman, a financial-services consulting firm in London.
“A lot of financial institutions have big holes in their balance sheets and haven’t begun to scratch the surface yet,” Rubenstein said. “We may be getting closer to the bottom but it may be that the bottom is a number of months away.”
Lending Drops
Bank lending has already slumped 73 percent in the past year, according to data compiled by Bloomberg. U.S. banks made $85 billion of leveraged loan commitments in the first quarter, down from $320 billion in the same period in 2007.
“They have to free up balance sheet space so they can become active again in new lending activity,” said Axel Potthof, who oversees European high-yield debt in Munich for Pacific Investment Management Co., manager of the world’s biggest bond fund and a unit of Munich-based Allianz SE. “The problem is they’re blocked, they can’t do new lending business because they still have this on the balance sheet.”
To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net; Cecile Gutscher in London at cgutscher@bloomberg.net
Last Updated: April 29, 2008 15:24 EDT
http://www.bloomberg.com/apps/news?pid=20601109&refer=exclusive&sid=aOFzLXJwnmtM
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Lehman Plans EU1.1 Billion CLO to Cut Buyout Loans (Update1) |
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Lehman Creates CLO to Get Buyout Loans Off Its Books (Update1) |
Aprés TAF, le CLO déluge?
FT Alphaville, UK -
Most has been written about the Lehman CLO - Freedom. Freedom is a $2.8bn collateralised loan obligation just closed by Lehman to shift all its LBO debt off …
Aprés TAF, le CLO déluge?
One interesting chart doing the rounds right now shows the Fed’s reserve holdings on July 18th last year and compares them to their current composition. Whereas in the summer of ‘07, nearly 90 per cent of the balance sheet was in Treasuries, as of April 2, just north of 50 per cent was. It doesn’t look healthy.
And in the past few days - in the wake of this and this - there’s been a lot of discussion about investment banks abusing the Fed’s new post-TAF discount windows (PCDF, TSLF) to turn a swift buck on the back of more structured chicanery.
Most has been written about the Lehman CLO - Freedom. Freedom is a $2.8bn collateralised loan obligation just closed by Lehman to shift all its LBO debt off its books.
It was rather elliptically suggested by Bloomberg (from a Morgan Stanley analysis) that Freedom’s notes had been used as collateral by Lehman in the Fed’s primary dealer credit facility. And that that was - in the main - the reason the CLO had been created and successfully closed.
But there’s some confusion. In this article, Bloomberg say Lehman sold the $2.2bn of senior notes in Freedom “in a private placement”, which can’t be true if they’re being used in repos with the Fed by Lehman. As for the equity tranche, it’s unrated, so the NY Fed won’t accept it as collateral.
The WSJ reports that only some of the senior notes may actually have been pledged to the Fed. The small amount was supposed to “test” what the Fed would accept.
Since the test seems to have gone well, can other banks be expected to jump on the CLO bandwagon? JP Morgan is understood to be doing just that - with rumours of senior notes of a recently closed CLO being pledged in the PCDF.
But even if Freedom, and other CLOs, were created with the express intent of pledging notes to get liquid collateral through the PCDF, so what?
Is this not, afterall, exactly the kind of greasing of the broken high-finance machine that the Fed is hoping to achieve? And forget not that a CLO with a first loss equity tranche, is going to be safer than the sum of its parts.
(Interesting aside: in its latest CDO monitor, JP Morgan analysts said that single-A CLO tranches were the “sweet spot” in the capital structure - unlikely to suffer losses even in a stressed environment yet still offering attractively high yields. Does the Fed know this?)
In a way, this all cuts back to the debate on just how successful - or not - the whole gamut of market-moving facilities established by the Fed (TAF, TSLF, etc etc) have been.
This entry was posted by Sam Jones on Monday, April 14th, 2008 at 11:44
When iPhones Go Missing
Wall Street Journal -
Lehman Brothers Holdings is the latest. The firm headed by Richard Fuld Jr. just rolled out a $2.8 billion CLO called, appropriately enough, Freedom. …
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Lehman’s loan clearout |
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How Lehman Opened the Fed’s Spigot |
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Lehman’s price on Freedom |
Buyout CLOs May Be Used for Fed Loans, Analysts Say (Update2)
Bloomberg -
Lehman Brothers Holdings Inc., the fourth-largest US securities firm, last month created the $2.8 billion Freedom CLO, the largest this year, …
Carlyle, Deutsche Bank Seek to Raise $500 Million CLO (Update3)
By Pierre Paulden
April 21 (Bloomberg) — Carlyle Group, the world’s second largest private-equity firm, is raising a $500 million collateralized loan obligation to buy high-risk, high-yield debt being sold by banks at discounted prices, according to people with knowledge of the plan.
The CLO is being arranged by Deutsche Bank AG, said the people, who declined to be identified because the terms aren’t public. The fund follows a similar $450 million CLO that Carlyle and JPMorgan Chase & Co. closed this month.
Carlyle, the Washington-based buyout firm run by David Rubenstein, joins Blackstone Group LP and Apollo Management LP in purchasing loans from banks that have struggled to sell the debt after losses on securities tied to subprime mortgages caused investors to shun all except the safest of government bonds. Private-equity firms are emerging as buyers at a time when financial institutions from Goldman Sachs Group Inc. to Citigroup Inc. are willing to sell the loans for as little as 63 cents on the dollar.
“Private-equity firms have the capacity and interest in buying these loans,” said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York.
Michele Allison, a Deutsche Bank spokeswoman in New York, and Ellen Gonda, a Carlyle spokeswoman, declined to comment.
CLOs package loans and channel the income to investors in portions of varying risk. They are a form of collateralized debt obligation, the entities that helped spur demand for high-yield debt before the credit-market slump.
Cutting Backlog
The CLOs by Carlyle are part of a return to issuance after sales ground almost to a halt. Firms sold $16.7 billion of CDOs in the first quarter, including $13.4 billion CLOs, compared with $165 billion in the same period a year earlier. Blackstone Group LP’s GSO Capital Partners is creating a $381 million fund named Tribeca Park CLO, Lehman Brothers Holdings Inc. analysts said in a report dated April 18.
“The CLO market never died, it’s been dormant,” Morgan Stanley analyst Vishwanath Tirupattur said in telephone interview. Only managers with “significant experience and access to capital,” can raise a CLO, he said.
Banks have cut their backlog of so-called leveraged loans to $95 billion from $245 billion in July by offering discounts, according to New York-based Standard & Poor’s. New York-based Citigroup sold $8 billion of loans to buyout firms in the past quarter, the bank’s Chief Financial Officer Gary Crittenden told investors April 18. Frankfurt-based Deutsche Bank sold $5 billion to private-equity firms, according to Lehman analysts.
Prices Rise
By reducing the mass of unsold loans on bank balance sheets, banks and private-equity firms are helping Federal Reserve Chairman Ben S. Bernanke’s effort to unfreeze credit markets. Wall Street chief executive officers including JPMorgan Chase & Co.’s Jamie Dimon, Goldman Sachs Group Inc.’s Lloyd Blankfein, Lehman Brothers Holdings Inc.’s Richard Fuld and Morgan Stanley’s John Mack said in the past two weeks that they’re optimistic the worst of the credit crisis is over.
Prices for average actively traded loans have risen almost 5 cents to 91.16 cents on the dollar in the past two months, according to Standard & Poor’s. Even so, the percentage of loans trading below 80 cents on the dollar is at 14 percent, up from less than 1 percent in November, according to Lehman analysts.
High-yield, or leveraged, loans are rated below Baa3 by Moody’s Investors Service and less than BBB- at S&P.
Collapsed Fund
Royal Bank of Scotland Group Plc, the U.K.’s second-biggest lender, plans to start a fund to transfer the risk of losses from 1.5 billion euros ($2.3 billion) of high-yield loans, according to three people with knowledge of the proposal.
In addition to the CLOs, Carlyle raised a $1.35 billion fund to buy loans and bonds of troubled companies. Carlyle is stepping up to take advantage of low prices even though it was forced to close a $22 billion fund run by its Carlyle Capital Corp. unit that invested in mortgages. The fund collapsed as lenders seized its assets after it couldn’t meet margin calls.
Deutsche Bank is marketing the $500 million Carlyle High Yield Partners 2008-1, the people said.
The CLO will consist of $383 million of bonds with the highest ratings and $52.5 million of low-rated bonds, the people said. Carlyle will hold the $64.5 million so-called equity portion, which receives income once interest payments on the bonds have been made.
Carlyle Credit
JPMorgan arranged Carlyle Credit Partners Financing last month, according to a prospectus. The CLO consists of $332 million of bonds with the highest credit ratings that will pay interest of 0.85 percent more than the three-month London interbank offer rate.
The JPMorgan CLO, “enables us to buy senior secured bank loans at attractive prices,” Michael Zupon, head of Carlyle’s U.S. leveraged finance team said today in a statement announcing the close of the $450 million fund. Carlyle manages $10.3 billion in leveraged finance assets globally.
The bonds were sold at 97.13 cents on the dollar according to the prospectus. JPMorgan sold shares in the $58 million riskiest portion at 66.6 cents on the dollar. Brian Marchiony, JPMorgan spokesman, declined to comment.
To contact the reporter on this story: Pierre Paulden in New York at ppaulden@bloomberg.net
Last Updated: April 21, 2008 12:39 EDT