Let us set the Way Back Machine to May of last year, shall we?
Bain Capital and Thomas H. Lee Partners sweeten their offer for Clear Channel Communications to $39.20 per share. Clear Channel's board, which had been rather iffy, backed the offer the next day, setting the stage for a $19.5 billion dollar buyout with CitiGroup, Morgan Stanley, Credit Suisse, Royal Bank of Scotland, Deutsche Bank and Wachovia pitching in to provide at least $17.5 billion in debt to fund the transaction. Of this, some $12.6 billion would be lent at 300 or so basis points over LIBOR (or something south of 6.0% today), with the remainder at a spattering of different arrangements and rates. It seems clear that most of the instruments were to have seven year maturities. Clear Channel today, is looking at about $1 billion in interest payments against over $2 billion in EBITDA on such a deal. Not bad considering not too many months ago that interest would have been more like $1.5 billion.
Back "in the day," (say, November of 2006) the banks were so anxious for the opportunity to do the deal, they cut very "covenant light" terms in order to participate (and claim almost $500 million in advisory fees).
Alas, by February, things were looking bad. The collapse in credit meant that, if they could sell it at all, the banks would have to take a 15-20% haircut on the debt. That looks suspiciously like $2.5-$3.0 billion in losses. And you can imagine how eager the banks are to hold any leverage on their books in the post-Bear world.
Bain and Thomas H. Lee, meanwhile, are subject to $500 - $600 million in breakup fees if the buyout falls apart. They are also, likely, contractually bound to exert "reasonable efforts" to close the transaction. No foot dragging, folks.
Clear Channel is trading at around $28.25, making them badly anxious to close at $39.20.
Clearly, the banks have not been as anxious to close. To hear Bain and THL tell it, the banks started dragging their feet early on. Most recently, they claim, the banks have insisted on pressing terms that would make the entire transaction economically unsound. (Specifically, moving the 7 year term of the loans to 3 years). Before that, Citi threatened, it is claimed, to pull out of the Bain-3M transaction, citing the Clear Channel terms.
So Bain and THL sued.
You might think that Bain and THL would prefer not to close, weak economy, adverse conditions and all, and some writers have been tempted to attribute the lawsuits (one in New York, one in Texas) to simple tactics by the private equity partnerships to avoid being sued by Clear Channel for failing to exert "reasonable efforts" to close the deal. This is hard to figure, I think.
There are some 50 LBO deals sitting on the sidelines waiting to get done. Billions of dollars in equity investment are idle, pulling returns down and irritating limited partners. Even today at $39.20, Clear Channel looks like a rather lucrative deal for the sponsors. Plus, ignored by many commentators, breakup fees that private equity firms pay are often offset against the jealously guarded management fees the funds are used to. Limited Partners are not going to get stuck with that bill, I suspect. General partners, then, want to close the deal. Now.
The banks look to have a pretty weak case, on top of it all. So why press it? Obviously, they are not the most popular entities in the marketplace today. The arguments they make against funding the deal (as their commitment letter would seem to commit them to) require some awfully tortured linguistic treatment, and a Federal Judge just tossed one of the cases out of Federal court and back to Texas (Clear Channel's Home turf). What are they thinking?
Paulson.
Stall, let a recovery in the debt markets mature post-Bear, and maybe they only have to sell that debt at a 5% haircut (or at least not 20% in the immediate fallout of Bear). That delay could be worth $1.7 billion dollars, on top of whatever they might be able to negotiate out of the deal after another round at the table.
Risky? Sure, not to mention somewhat blind to the reputation loss they face now that litigation is in full swing. But banks aren't particularly reputed at present anyhow. Perhaps spending that capital now in return for a billion or so is worth it (to someone).
Posted by guest , Apr 03, 2008 10:03AM
Darn straight. You tell it to 'em, sister.
While Paulson tells homeowners with negative equity in their homes to meet their contractual commitments to make mortgage payments, he's strangely silent on banks with negative equity in loan commitments to fund those loans.
Hypocritical bastards.
Posted by diablo , Apr 03, 2008 10:05AM
this is like the penguin, the riddler, mad hatter and the joker all fighting among themselves. nobody to cheer for. but i'm sure my favorite county in texas will make it worthwhile for tabloids like DB. can't wait to see the taped depositions if any come out of this. good texas ol'boy attorneys yelling to wall street lawyers to "shutup boy" will be highly entertaining.
Posted by Random Banker , Apr 03, 2008 10:11AM
Equity Private lets get in the Day-Back machine instead... and go back to last night. Did you see Pete Peterson on Charlie Rose? He was channelling you or you normally channel him or I don't know which one but it was fucking amazing. It was like the buy side equivalent of the fucking Vulcan mind meld. The old fart was railing against government entitlements like there was no tomorrow. Something about a short fall in medicare, had you heard about this?
Then he moved on to denouncing attempts to tax carried interest. His dentures were a little loose so he wasn't annunciating too well but I could make out something about carried interest being result of principal investing therefore being a capital gain. Then he went on to say that he was taxed at 38% and his two assistants were taxed at a mere 21% and how he shouldered more of the tax burden as it was.
Now this was the point that really got me thinking. What a stingy fucking bastard Peterson is!!! He pays his assistants so shitily that they're paying 21% income tax? Either the dinosaur is lying or he's one major league asshole. He and his boy crab hands just bilked the tender headed half commi/half retard Chinese government out of all their rice money and he can't even spread the fucking wealth to his assistants? They know all of Peterson's dirty little secrets!
Well Henry Kravis this is your wake up call, all the dirt in the world is to be had on Pete Peterson all you need to do is bribe his impoverished help. Have at it.
P.S. The other day I accidentally implied that you were a right wing "half wit". I'm sorry. I meant to type "nit wit"
Posted by guest , Apr 03, 2008 10:34AM
At the end of the day, what matters (if you're keeping score in $) is not the 38% tax vs. 21% (although I would imagine if you figured in the impact of payroll taxes it would be something like 30% vs. 40% - yeah, and how does he pay people so little as to have them be in that bracket?) but the lifestyle you lead as a result of what you take home. And Peterson's is extraordinary. So how dare him complain.
Posted by GinNTonic , Apr 03, 2008 10:43AM
NFW that you can sell radio bank paper at 95 in 08. Most of the radio is trading in the high 70s / low 80s. Unless BCE and some other forward calendar deals fall away, and new CLO issuance dramatically picks up, its going to be at sold at an OID of 80-85 in the forseeable future.
The notes are going to be stuck in bridge forever.
Posted by GinNTonic , Apr 03, 2008 10:43AM
NFW that you can sell radio bank paper at 95 in 08. Most of the radio is trading in the high 70s / low 80s. Unless BCE and some other forward calendar deals fall away, and new CLO issuance dramatically picks up, its going to be at sold at an OID of 80-85 in the forseeable future.
The notes are going to be stuck in bridge forever.
Posted by guest , Apr 03, 2008 10:48AM
I don't know why but for some reason I always expect EP to respond, "That's absurd" to criticisms.
Posted by Anonymous , Apr 03, 2008 10:51AM
what's NFW?
Posted by guest , Apr 03, 2008 10:53AM
Couldn't you make up to around $100K and have an overall tax rate of 21%? But how do you get to a 38% rate when highest marginal is 35%?
Posted by GinNTonic , Apr 03, 2008 10:57AM
NFW = no fing way
Posted by Master of None , Apr 03, 2008 11:04AM
@10:53AM
Some of us pay state income taxes.
Posted by guest , Apr 03, 2008 11:08AM
Someone making around $100k would have an overall tax rate of 22%... unless there's lots of other deductions and crap. His assistants are probably making around 100k, which is pretty fucking impoverished by Blackstone standards.
Posted by guest , Apr 03, 2008 11:10AM
11:04 True, but presumably a lot of his income is taxed at the cap gains rate. Plus his deductions (which includes state taxes) are at close to the 35% marginal rate.
Posted by guest , Apr 03, 2008 11:12AM
11:10 here again, got interrupted.. So is he really paying 38%? Sounds like bs to me.
Posted by guest , Apr 03, 2008 11:45AM
Please be advised that our group, "BIDET" , was formed to encourage individuals to stop using the phrase "Back in the day..." as such a phrase is a colloquialism and poor form of style. Our group, "Back In (the) Day Excision Team" or BIDET hopes that numerous educated individuals and well informed editors will politely halt the growth of usage of that phrase, "Back in the day.....".
Bob Betadine, BIDET -501 (c) (3)-
Posted by HAM05 , Apr 03, 2008 11:53AM
your group is named after a ball sink
Posted by guest , Apr 03, 2008 12:00PM
I thought it was a cee-u-next-tuesday sink.
Posted by guest , Apr 03, 2008 12:04PM
im not european but i'm pretty sure they are not for your balls.
my parent company is swiss, they have bidets in all the restrooms, which is a little weird even for the swiss.
Posted by guest , Apr 03, 2008 12:14PM
HAM05 - there's something wrong with the location of your balls. You should have that looked at.
Posted by guest , Apr 03, 2008 12:16PM
Ah, Bidets..I miss europe. Nothing replicates that freshness.
Posted by guest , Apr 03, 2008 12:19PM
He might have Low Balls, like larry david. HAM you should get some special no-fly underwear.
Posted by guest , Apr 03, 2008 12:22PM
@12:16 Ever been to Tokyo? They have this Toto bathroom seat thing that's even better. Hard to explain - sort of like a water pik aimed at your pie hole. Then it follows up with warm air. The Japanese must come here and think we're filthy barbarians for not having that stuff.
Posted by HAM05 , Apr 03, 2008 12:26PM
ball sink just sounded better than ass sink, but yes - a bidet is mostly for your post-poop bum. personally, i think theyre amazing and am genuinely upset theyre not as widespread here. in an effort to gain some comfort though, my apartment has recently switched to babywipes - not quite, but almost as good in a 'pinch'
Posted by guest , Apr 03, 2008 12:39PM
@12:22 And arn't we? Very caveman-like to wipe the shit with dry tissue and call it a day. Nasty.
Posted by ep , Apr 03, 2008 2:12PM
"NFW that you can sell radio bank paper at 95 in 08. Most of the radio is trading in the high 70s / low 80s. Unless BCE and some other forward calendar deals fall away, and new CLO issuance dramatically picks up, its going to be at sold at an OID of 80-85 in the forseeable future."
Personally, I agree. But even if the markets go nowhere, which is worse, $3 billion paid today, or $3 billion paid at some later date? With this volatility in debt markets, you tell me, what's a one month variable put option worth?
Posted by ep , Apr 03, 2008 2:14PM
"I don't know why but for some reason I always expect EP to respond, "That's absurd" to criticisms."
I guess the appropriate response might be: "That's absurd."
Posted by ep , Apr 03, 2008 2:26PM
"Did you see Pete Peterson on Charlie Rose? He was channelling you or you normally channel him or I don't know which one but it was fucking amazing."
Oh no, my secret identity is revealed.
"P.S. The other day I accidentally implied that you were a right wing 'half wit'. I'm sorry. I meant to type 'nit wit''"
It's "nitwit," nitwit.
Posted by guest , Apr 03, 2008 2:32PM
@2:14 thank you that was very gratifying
Posted by guest , Apr 03, 2008 2:33PM
I love this more interactive side of eqp
Posted by guest , Apr 03, 2008 2:34PM
In addition to the financial incentive conspiracy theory that EP advocates, I think the banks actually have a pretty good case. As stated at the Tulane M&A conference, the latter half of 2007 was "like one big MAC." Everything changes and those commitment letters that the sponsors extorted out of desperate LevFin desks back in the first half of 2007 are not speaking a language that means anything anymore. Equity Bridges? Cov-Lite? What is this shit?
Posted by Random Banker , Apr 03, 2008 2:56PM
@ 2:34:
Are you shitting me? the banks knew what they were doing. You think the levfin desks were the one innocent virgins in the whole whore house? They were playing a game of musical chairs trying collect the syndication fees (and accompanying bonuses) while not being left with shit on their hands when the music stopped. Oh and since the bankers had a decent shot at getting laid of if a credit crisis hit anyway what incentive was their no to get while the getting way good.
Now they're complaining cause the caps are too tight? Well like old man Gekko said, remember the tail of Winnie the Pooh and the Honey Tree, "You know what happened? He stuck his nose in the pot once too often...and he got stuck. "
Equity Nitwit is right on this one.
Posted by guest , Apr 03, 2008 3:11PM
I'm interested in the reputational damage here and what that will mean when the credit markets show some life at some point in the future, allowing leveraged deals to get signed up again. Sure, this doesn't look good for the banks, but every bank with a presence in the leveraged finance business is on clear channel / named in these suits, with the notable exception of JPMorgan (and Goldman, sort of). So this is another win for JP, but other than that I don't know. THL and Bain are going to need to go to the banks in the future for financing if they want to do LBOs, so it's not like they won't be doing business with these guys again after the dust settles.
Posted by guest , Apr 03, 2008 3:14PM
@2:56 The way it really works is the guys who cover small shops (like EP's!) are the ones who get the can to make up for the big mistakes. You really think the guys with the relationships with Bain and THL are getting the can? Oh right, after this, what relationship?
Posted by GinNTonic , Apr 03, 2008 4:15PM
@ep 2:12
The question is: Is the variable put option worth more than the banks funding the deal at max flex / caps and receiving interest now vs. later.
@3:11
Future deals in the short term are not going to be $10bn deals, so they won't need a bank book with 15 different logos on the cover anymore. Most new deals should be easily covered by 2-3 banks. JPM, BofA, ML, GS, Barclays, UBS, Lehman, etc. would love the fees.