HOME | WHAT IS SOCIO TIMES? | CONTRIBUTE | ARCHIVES |
Pete Kendall's Socio Times: A Socionomic Commentary
CULTURAL TRENDS | SOCIAL CHANGE | MARKETS | ECONOMY | POLITICS


BREAKING NEWS
June 12, 2007
For KKR, Bumps in     Its Buyout Binge
As Wall Street digests a feast of buyout deals announced during the past few months, one especially active buyout giant, Kohlberg Kravis Roberts & Co., is finding they don't all go down easy.

KKR has tapped out some of the traditional investors it might typically turn to in funding large transactions, setting it on a different course in the $29 billion acquisition of First Data Corp., a processor of electronic payments. People familiar with the matter say the deal isn't in jeopardy, but in its search for new partners in the acquisition, KKR finds itself haggling over terms it once could dictate.

The tensions it has encountered underscore how saturated the market has become for some big private-equity deals. It also underscores the challenging environment private-equity firms could be facing -- investors are pushing back against some deals just as rising interest rates could make it more expensive for them to borrow money.

"We have enough exposure to KKR already," says an executive at one major investor who invests money in private-equity firms.

Lining up co-investors this time has been complicated. KKR has been on a historic deal spree of late, taking part in five of the eight-largest buyouts of the year, including the buyouts of TXU Corp. and Dollar General Corp. Some traditional co-investors have balked at participating in the First Data buyout because they have been writing too many checks to fund other KKR buyouts lately.

As its table of existing investors gets tapped out, KKR has turned to hedge funds and other investors for additional equity. In recent days, KKR has clashed with them over the fees these investors would have to pay for that equity, according to people familiar with the deal.

At issue in the latest round of haggling is the fees KKR's new batch of investors will have to pay. Terms aren't in place for outsiders, who have been asked to pay as much as 20% of the carry to KKR. These investors have instead been fighting for 10% to 15%, according to people involved in the deal.

 The tensions also highlight an obscure but important cog in the private-equity deal-making machine -- the bridge-equity commitment. These are equity commitments taken on by banks to help their private-equity clients speedily sign up a transaction. The banks put up the money as a bridge for a short period of time, until the stakes are sold by private-equity firms to investors. Until that equity is placed, banks are on the hook for the equity.

Wall Street is deeply paranoid about bridge financing. 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 Co. When the junk-bond market collapsed soon afterward, First Boston couldn't refinance the loan and ended up owning most of Ohio Mattress.
The Wall Street Journal


June 2007
S M T W T F S
          1 2
3 4 5 6 7 8 9
10 11 12 13 14 15 16
17 18 19 20 21 22 23
24 25 26 27 28 29 30

« Previous | Main Page | Next »

On a Clear Day, Wall Street Faces a Hurricane of Paper
Category: NEWS
By: Pete Kendall, June 12, 2007

By cutting [a derivative] up in so many ways or complicating it by so many levels, do you still have clarity...on the nature of the underlying risk? It’s not clear that we haven’t gone, in some ways, too far. -- Louis Ranieri
The Elliott Wave Financial Forecast, May 2007

 Bridge financing is suddenly becoming an issue because many participants realize it is one of the capital market’s most important stress points. When the easy money ceases to flow, the holders of the big bridge loans are first to catch the full force of the shift. As the Ohio Mattress episode reminds the industry, it can be a fatal blow. The First Data deal could be the latest version’s bridge too far.

 “It doesn't feel like the game is going to come to an end just yet,” asserts today’s Wall Street Journal. But reading between the lines, we see many, many signs that the love affair with risk has run its course. One is the response U.K. Prime Minister, Tony Blair, got when he expressed concerns over the investment climate in Russia. Even though Moscow recently stepped up moves to tighten its control over the energy sector, “dozens of global chief executives paid homage to Russia’s growing economic might” and basically told Blair to shut up. Peter Hambro Mining, an Aim-listed company with extensive interests in Russia, said on Mr Blair’s comments “ran the risk of being damaging” for British business interests. Despite Russia’s belligerent attitude toward business “there are few dissenting voices from the denizens of global business” including the heads of Deutsche Bank, Citigroup, Chevron Corp, Royal Dutch Shell and BP who all attended a recent forum in Moscow. It’s understandable that they might not want to be the ones to sound a warning, but their alarm at Blair’s willingness to do so suggests that it is, in fact, time for the “financial fallout,” called for in recent issue of The Elliott Wave Financial Forecast. The chairman of Barclays Capital actually insists that “Russia’s transition to a market economy has been successful and cannot be undone.”

In a classic finishing touch, his firm just announced the opening of a 200-person Moscow office. Goldman Sachs, Lehman, Merrill Lynch and UBS are also expanding their investment banking businesses in Russia. In fact, $7 million to $10 million a year offers to managing directors in Moscow make it the best paying investment banking post in the world right now. Wall Street’s rush to establish satellites in a place where the leader garners 70% approval ratings despite an increasingly autocratic style and a very questionable commitment to the rule of law is sure sign that financiers have lost all respect for what can happen when asset prices retreat. As the EWFF demonstrated in May 2000, Wall Street has a special talent for committing resources to bull markets as they reach their final destination. As we suggested here on April 4, this may well have been demonstrated once again by the street’s recent commitment to giant new trading floors.

Wall Street’s seemingly unquenchable demand for risk is explained in a column in today’s Wall Street Journal:
Skewed Incentives Whet Appetites for Greater Risk

 Noting that “risk appetites are determined by the balance between greed and fear,” the article relates that while fear is increasing, “greed has been increasing even more rapidly.” “Hedge-fund managers, buyout barons, investment bankers and oligarchs are infected more by greed than by fear largely because they often have safety nets. Managers of hedge funds and private-equity firms -- the two dominant species in the modern financial jungle -- typically collect 20% of the profits when things go well. But they don't share in the losses when things go badly. This one-way bet accentuates greed and blunts fear.” As EWFF has also noted, bankers are similarly inclined because they “don't make loans the way they did in the past, keeping the risk of default in-house. Instead, they mainly originate loans, collecting fees. As long as bankers can play this game of pass the parcel, they don't face much risk.”

The loans are then doled out to syndicates which are taking increasingly exotic forms. “In many cases, the suppliers of debt (particularly for leveraged buyouts) are collateralized loan obligations (CLOs) and hedge funds that specialize in credit. These, too, earn fees by cranking out deals. Since they aren't principally playing with their own capital, their risk appetites also are skewed. This cat's cradle of one-way bets doesn't just anesthetize fear. It encourages a breathless accumulation of assets. If the public is willing to let you play ‘heads I win, tails you lose’ with $1 billion, that's pretty nice -- but how much better to play with $20 billion.” As the May issue of EWFF noted, however, there is an important catch that is starting to turn up in the subprime mortgage area where the decline is already well established. When the trend reverses, these well-dispersed risks become a huge burden because they make establishing and complying with workouts and bankruptcy terms hopelessly complicated. As EWFF noted in May, scattered syndicates mean “more parties must comply with the terms of each default,” which slows “down decision making enough to turn even a mild recession into ‘systemic disaster.’ In this way, the financial engineering that pushed debt levels, valuations and investor optimism through the roof on the way up reverses and will foster an atmosphere of rising caution, falling prices and ill will.”

It’s an almost impossible juggling act, but, as long as the stock market was rising, Wall Street could keep all the balls in the air. But the first return to earth is now very clear in deals like Bear Stearns’s High-Grade Structured Credit Strategies Enhanced Leverage Fund. The fund, which has a big exposure to low grade subprime mortgages, fell 23% from the start of the year through late April. According to an account in the Wall Street Journal, observers are convinced “the paper losses will have a limited impact on Bear” because it moved the funds into a separate corporate entity, Everquest Financial Ltd. But the Journal also reported, “Some market participants predict the fund's downturn could have a chilling effect on Bear's planned initial public offering of Everquest.” The paper adds, “Recently, the fund prevented some investors from pulling their cash [from the High Grade Structured Credit Fund].” The harder Wall Street asserts “everything is fine,” the quicker the conversion from liquidity boom to bust is likely to unfold. 

Post a comment




(you may use HTML tags for style)

RECENT ARTICLES
June 13, 2007
Last Stop for New Highs: NYC's High Line Conversion
read more
June 12, 2007
On a Clear Day, Wall Street Faces a Hurricane of Paper
read more
June 11, 2007
A Merger Fever Deal Breaker: Whole Foods/Wild Oats
read more
June 8, 2007
Immigration Bill Failure Uncovers Drop in Racial Unity
read more
June 7, 2007
Can a Mania Function at the Point of Gun? This One Can!
read more

ARTICLE COMMENTS


HOME | WHAT IS SOCIO TIMES? | CONTRIBUTE | SEARCH    Copyright © 2024 | Privacy Policy | Report Site Issues