• 07 Dec 2006 at 10:03 AM
  • analysis

Private Equity’s Access To Better Debt

The other day we pointed to a primer on private equity that ran in the New York Sun. Almost in passing, that article noted that a private equity firm had recently “concluded a deal in which there were no covenants.” This is something that deserves more attention than it gets, in part because easier access to debt is one of the things that is helping drive the boom in private equity.
Debt covenants are promises companies make to lenders when they borrow money in the form of bonds or bank debt. Often these covenants restrict the amount of additional debt a company can borrow, require the company to meet certain financial revenues and may restrict the kinds of business a company can engage in, what kind of capital expenditures it can make and prohibit dividends until the debt is paid off. Particularly for troubled companies, these covenants are often merely common sense and may even help a company by giving it some corporate discipline.
But they can also be a burden on a company, particularly in a dynamic or growing industry. The amendment process to change the covenants can be difficult, requiring the agreement of many lenders. Substituting new debt is often an expensive process, giving rise to prepayment premiums and fees from lawyers and investment banks.
Getting lighter covenants is a goal of most companies seeking debt. And here is where private equity has an advantage. A single company may only need to come to investment banks seeking debt once every five years or so. This is a very long time on Wall Street. It means that bankers with relationships with these companies aren’t going to be collecting fees from them very often, which gives the companies less leverage when negotiating covenants.
Private equity firms change the dynamic. They may have multiple portfolio companies seeking new debt each year. Which means they are throwing a lot of fees at the bankers involved. This gives them greater leverage in the conference room. Everyone wants the business of the private equity shops, which means they get concessions a single company wouldn’t be able to get. When KKR or Tommy Lee are on the other side of the table, they basically get what they want. You can bet that the borrower who got a covenant free loan was sponsored by one of these guys (assuming it wasn’t an investment grade company).
In short, private equity shops can get good deals for their companies because they do so many deals.

  • 24 Nov 2006 at 12:17 PM
  • analysis

Forget Black Friday. How About Gold Friday?

Looks like that Peter Brimelow column we linked to this morning was dead on. Gold up. Dollar down.
And with that, the DealBreakers are just about DFD. Write-offs up next.

Gold prices climbed 1.4 percent on Friday on a weaker dollar, with the absence of U.S. players making the market choppy, dealers said.
Platinum also gained, but traded well below this week’s record high of $1,395 an ounce on talk of an exchange traded fund (ETF). Other precious metals followed gold’s upward move.
“The market is trying to get up to $640 an ounce at some point, but there are some sell orders around there,” said a precious metals trader in London.
“The dollar is weak at the moment. The market is fairly thin so it didn’t take a huge amount to move it up,” he added.
Spot gold was quoted at $639.30/640.30 an ounce by 1453 GMT, up from $630.30/631.30 late in London on Thursday.

Gold moves higher as weaker dollar spurs buying

  • 21 Nov 2006 at 4:30 PM
  • analysis

Act Now! Supplies of Stock Running Out!

soldoutstocks.jpgDaniel Gross at Slate writes:

This year is shaping up to be a record for both leveraged buyouts and stock buybacks. According to Thomson Financial, buyouts worth $334.5 billion have been announced or completed so far this year, up from $115 billion for all of last year. According to Standard & Poor’s, members of the S&P 500 Index spent $325.15 billion on their own shares in the first three quarters of 2006 and have spent more than $674 billion since Jan. 1, 2005. Between buybacks and buyouts, that’s more than $1.1 trillion of stock taken out of public hands in less than two years.

The Mystery of the Disappearing Stocks

  • 20 Nov 2006 at 3:06 PM
  • analysis

Unwriting The Rewritten Rules For Buyouts

sorkincarneygasparino.jpgWe kinda love Andrew Ross Sorkin (pictured left with DealBreaker’s John Carney and CNBC’s Charlie Gasparino at the DealBreaker launch party, as photographed by Gawker’s Nikola). We literally wake up with him every morning, frantically composing an aggregation of his aggregation of business news over at DealBook. He’s a nice guy and seems to be one of the smarter people doing business writing. I mean, we like him so much that when we last ran into him and he asked about our very own Bess Levin, we offered to introduce him to her. If you have any idea how closely we protect Bess, you know this is a very big deal.
But his essay in Sunday’s New York Times Business Section on management buyouts this weekend was a bit, uhm, innocent. Not clown-suit, Ben Stein level stupid. But just a bit too bright-eyed student essayish. After the jump, we dissect brother Sorkin’s Sunday sermon.
Rewriting the Rules for Buyouts [New York Times]

Read more »

  • 09 Nov 2006 at 11:01 AM
  • analysis

HBS Grads Flock To Wall Street, Ruin Market

Hawes-hbs.jpgOkay. Fine. That’s probably not the way the Harvard Business School market signaling metric described below works at all. But we still kind of like the idea of too many HBS graduates getting a little to aggressive with those pitchbooks and tanking the market.

Everyone has his own method of timing the market. When Joseph Kennedy’s shoeshine boy began asking him for stock tips in 1929, old Joe had a hunch it was time to sell.
Ray Soifer, a retired executive from Brown Brothers Harriman, has his own system. And it’s proven itself to be a splendid long-term indicator of the American equities market.
Mr. Soifer tracks how many Harvard Business School graduates choose market-sensitive jobs each year. If 10% or less of that year’s class take jobs in investment banking, investment management, sales & trading, venture capital, private equity, or leveraged buy-outs, it’s a long-term ‘buy’ signal.
If 30% or more take such jobs, it’s a long-term ‘sell.’
This year, some 37% of Harvard Business School’s graduate found work on Wall Street, up from 30% a year ago and 26% for the Class of 2004. The trend suggests that Wall Street is becoming bloated and the American economy is ripe for a slowdown.

Equities Swing With Harvard MBAs [New York Sun]

  • 06 Nov 2006 at 12:39 PM
  • analysis

Dow 13,000? Not So Fast

Kevin Duffy of Bearing Asset Management has a column on Lew Rockwell’s site laying out lots and lots of example of, uhm, irrational exuberance about the market. It’s not so much the optimism that’s making him nervous but about the ubiquity of the optimism.

Never confuse a stampeding herd with the facts. Only in a bubble can the majority – utterly intolerant of dissent – delude itself into believing it is in the dissenting minority. We’re not sure whether such behavior is disingenuous or simply dysfunctional. Perhaps the old saw applies: “When everyone is thinking alike, no one is really thinking.”

Sell Dow 12,000

  • 05 May 2006 at 12:39 PM
  • analysis

So Long, Sell-Side?

tombstoness.jpgA few years ago, when we were younger and stupider, we predicted the death of sell-side analysis (citing RegFD, access to data, etc) half-joking suggesting that it would be reclassified as “marketing”. And then sell-side analysis stubbornly refused to die, much to our disappointment. But Paul Kedrosky suggests that the end is near and Lehman’s already removing the feeding tube:

When is an equity analyst not an equity analyst? Apparently when they work at Lehman. That’s because Lehman is moving some analysts to the trading desk and calling them “desk analysts”… Unlike normal analysts, these desk analysts can give on-the-fly recs, don’t publish research, and aren’t bound by new SEC dislosure regulations. While a cynic would call this a way to end-run regulation, I think it an overdue change. Let’s stop pretending that equity analysts can operate in a some rarified world separate from how their income is generated (i.e., trading). Analyst are salespeople. Always have been, always will be.

When Is An Analyst Not An Analyst [Infectious Greed]

  • 27 Apr 2006 at 11:05 AM
  • analysis

DealBreaker Financial Tools™

In keeping with our continuing coverage of the “New, New Economy” we have begun collecting a series of mergers and acquisitions analysis and valuation tools. Cumulatively, we expect these will give the modern investment banker a goodly number of financial arrows in her quiver. On Tuesday, we formalized the Idov Multiple. Today we bring you the Kanige Chaos Theory of M&A due diligence.
(You’re welcome.)
Eventually, we expect that bankers who do not have these tools will be left behind in the fast-paced financial world, shortfalling $200 million dollar valuations of commerciablog firms and executing poorly vetted $500 million acquisitions of bricks and mortar publishing firms silly enough to sign a teenaged author.