At this point maybe we should just keep a list of who isn’t buying Lehman Brothers. Earlier this week it was the Koreans and HSBC. Now “sources familiar with the situation” have told Reuters (who broke the story of the Korean Development Bank) that Blackstone and Kohlberg Kravis Roberts are looking to acquire pieces Lehman’s real estate and asset management units.
Blackstone was said by the Financial Times to be out of the running for the asset management unit, so we’re assuming that it’s mainly interested in the real estate group. Has anyone seen Jon Gray, who runs Blackstone’s powerful real estate arm, over at Lehman HQ lately?
Blackstone, KKR eye Lehman assets: sources [Reuters]
KKR
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Posted in:
Blackstone
Today In Lehman Brothers: Blackstone & KKR Looking To Buy Assets
By John CarneyHow bad is the reputation of private equity? Months after private equity companies began to back away from deals that no longer seem promising in our credit crunched world, the Royal Bank of Scotland has told many of the biggest private equity firms they aren’t welcome in the first round of the auction of the bank’s insurance business, according to the Financial Times reports.
Kohlberg Kravis Roberts, Blackstone and Apax Partners had reportedly planned to bid in the auction, but were told by RBS that they were being excluded. Exclusion from the auction is widely being interpreted as demonstrating a clear vote of no-confidence in the ability of private equity buyers to secure financing necessary to close acquisitions.
RBS spurns buy-out groups [Financial Times]
Another day, another crisis in the credit markets. KKR Financial, which is a publicly traded investment vehicle run by Kohlberg Kravis Roberts, made headlines this morning when it asked for a restructuring of billions of dollars in short-term debt. Apparently they’ve struck a bargain with their investors to delay the repayment of the debt, which was due last Friday, until March. But reading about the story of KKR Financial is like watching the credit crunch in action.
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Posted in:
Henry Kravis
PE-Hating Documentary Film Makes Rookie Mistake (Of Not Getting Interior Shot Of Henry Kravis’s Fridge*)
By John CarneyBrave New Films held a screening of “The War on Greed: Starring the Homes of Henry Kravis” this morning in front of the KKR founder’s 625 Park Avenue apartment in an attempt to shame him into…something. Unfortunately, director Robert Greenwald didn’t do any recon before planning the event, and was disappointed to find out that Hank is currently on vacation in Palm Beach, at his 15,000 square foot home on North Lake Way, and would not be able to catch the flick**. Oh well. This is why they invented DVDs, and the WGA worked so hard on those sandwich boards.
The movie is a Cribs-style look at Kravis’s five homes, which he’s undoubtedly already familiar with, and includes some interviews with a bunch of people who make less money per year than the buyout king does in an hour– $51,369–for shock value. (Not too much shock or value, though, because there are no interviews with anyone who makes significantly less than HK, meaning this girl). No sequel starring Stephen Schwarzman (‘s houses) has been planned, because apparently SS’s homes don’t have the height to make them leading men material.
Dan Primack’s problems with the film are that Greenwald “tries to provide some “substantive” context, in a simplistic and damning definition of private equity,” he’s “stuck in the 1980s and early 1990s,” and his “definition of PE fails to point out that some PE-backed firms add employees and increase value for the shareholders – which happen to be public pensioners, universities and charitable foundations.” Mine are that it it doesn’t make me want to hate Kravis, it makes me (and the youth of America I watched it with) want to emulate him. And also, that there weren’t any shots of the gift-wrapping room in HK’s house in the Dominican Republican. Other than that, good movie.
The War on Greed [PEHub]
A Movie and Protesters Single Out Henry Kravis [NYT]
*The best part of every episode of Cribs
**KKR wouldn’t confirm this but I sense it’s true.
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Posted in:
Banks
Another One Bites The Dust: KKR and Goldman Kill Harman Deal And Walk Away With Treasure Chest Of Convertible Notes
By John CarneyAs we noted in Opening Bell this morning, another big buyout has gone the way of all mortal things. Today’s entry into the deal graveyard is the $8 billion Kohlberg Kravis Roberts and Goldman Sachs buyout of Harman International. According to most news stories on the deal, Goldman and KKR are forking over $400 million in exchange for convertible notes, Harman’s using the money for a stock buy-back, and everyone’s amicable, honky-dory, smiles and handshakes about the new deal.
But when we squint at the fine text, we’re not sure that Harman should be smiling so widely. According to the acquisition agreement, the company was due to collect a $225 million break-up fee if KKR and Goldman walked. So what’s seems to be happening is that they are selling $400 million of notes to the balking buyers for $175 million. Let’s call that a 57% discount. So Harman will now owe $400 million of principal to KKR and Goldman in exchange for just $175 million beyond what they were arguably already due according to the agreement.
But Goldman and KKR are getting more than just the notes. They are getting an option to buy the stock. Typically, a convertible note is linked to a share price that places the option currently out of the money. But if we follow through on the idea that Goldman and KKR are buying the notes at a discount, we can see that these are actually currently in the money. The $104 a share translates into 3.8 million shares for $400 million of notes. Those shares are now trading at $85, which means that the buyers have entitled themselves to $326 million of shares for just $175 million dollars.
To put it even differently, after the discount, the deal prices the shares at $59. We’re not sure that’s exactly the “vote of confidence” in Harmon that its executives are touting. Harman may now have an additional $175 million for a buyback but this seems a steep price to pay for that money.
Of course, if you figure that break-up fees are not sunk costs for dead deals because the buyers aren’t ever going to pay them anyway—a growing trend from private equity buyers, to be sure—then we guess it does sound like great deal for Harman. It’s probably just our short-sighted stinginess that makes us think in terms of additional, incremental dollars in the deal rather than the complete $400 million package.
KKR and GS Capital Partners to Invest in Harman International [Press release via Market Watch]
The market for LBO loans has opened up since the catastrophe of August. By offering the loans to investors at a discount, and eating the loss, the banks that committed to make them have begun to clear them off their books But, as the Wall Street Journal’s Henny Sender reports today, the amount of loans that have been sold—about $30 billion—are “a drop in the bucket” compared to the total of $310 billion of LBO loans still waiting to be placed. And that’s just from North American deals. Nearly a third of that is set to come into the market in the next thirty days, according to the Journal.
This data may shed new light on the reported plan of KKR to buy LBO loans from Citi, including LBO loans that went to finance KKR deals, and Citi’s reported plan to lend money to KKR to buy those loans. After speaking to several loan syndication professionals, we have come up with what looks like the logic of this deal.
The banks are worried that while there has been some investor appetite for LBO loans, there may not be enough to absorb the total amount they plan to bring to market. A flood of new loans selling into lowered demand could put pressure on the banks to make even steeper discounts, creating even larger losses at a time when the banks are attempting to put the legacy of credit market losses behind them. The alternative—keeping the loans on the books and hoping for better days ahead—is no better for banks trying to show shareholders that they cleaned the debt mess off their books.
Enter KKR. Without public shareholders and armed with lock-up agreements from investors, it can take a longer view of the debt market. Although a lot of debt is currently scheduled to come to market in the coming weeks and months, there may be a drought of those loans just over the horizon. The slowdown of leveraged-buyout deals this summer means that there will, eventually, be fewer loans coming to market. And this drought could hit just when investor appetite for debt is recovering. At that point, KKR would be in a great position to sell the loans at prices above the discounted price at which they bought them from Citi.
At the same time, Citi might be comfortable sitting on newer loans which it can claim it is syndicating on schedule rather than older loans. This is a sleight of hand but one that shows at least a certain kind of agility that Citi may hope will please investors. Citi too could hope to take advantage of a renewed appetite for debt and the coming LBO loan drought, and sell those loans at par, reducing losses that it might have incurred selling into a flooded market now.
We’ve said it before, but we’ll say it again: different time horizons create different profit opportunities. The logic of “if they’re buying, why are you selling” assumes a homogenous market of buyers and sellers, when in fact the market is characterized by heterogeneity. And private equity firms—at least those that don’t feel answerable for stock prices to public shareholders—are often in a position to take advantage of opportunities only available to those with longer time horizons.
Damn it must feel good to be a Kravister.
Debt on Sale: Banks Grease The Leveraged-Loan Machine [Wall Street Journal]
Let’s see if we have this straight. Citigroup wants to sell off some on the leverage loans it committed to before the credit crunch. Many of those loans were made to private equity owned companies for leverage buyouts, including companies that KKR bought. A fund managed by KKR is looking to buy the leveraged loans, which it believes are under-priced in the wake of the credit market turmoil. But everyone knows KKR doesn’t buy anything with cash: it borrows the money. So now, according to the Financial Times, Citigroup might lend money to KKR to buy Citigroup’s loans.
This is very possibly the best story ever. The only way it could get better is if KKR went on to buy the loans used to buy loans from Citigroup. And, of course, Citigroup lent it the money for that. And then, well, you get the point. In the end of our fantasy, Citigroup’s stock get’s hammered by investors skeptical of this snake-eating-its-tail lending scheme. And get bought out by KKR. With loans from….
Insiders report that credit market expert Charles Ponzi has been retained as an adviser to both Citigroup and KKR for the transaction.
Citigroup talks to KKR about leveraged debt [Financial Times]
First Data was supposed to be one of the big leveraged buyout deals teetering on the edge of extinction thanks to the credit crunch this summer. The debt load of the company was said to be at the outer limits, leaving it with razor thin margins for slip-ups. But last week investors snapped up its $5 billion buyout loan. In fact, the loan was over-subscribed by about $2 billion.
Last night First Data said the deal had closed. First Data has gone private, and its stock has been removed from the New York Stock Exchange.
Earlier this month, the buyout firm behind the deal, Kohlberg Kravis Roberts & Co, was said to be in a nasty negotiation with the seven banks involved in arranging the First Data transaction. The banks had become nervous about massive loans on their books, and were pressing KKR to renegotiate its deal. KKR eventually did offer one concession—a leverage ratio financial test in its bank loans that has been described as “toothless” and “mere optics.”
While there are still questions about the financing—banks continue to look for ways to syndicate the nearly $24 billion in debt financing they committed to the deal—but fears that the credit crunch might derail the biggest deals, or leave a the financing banks with large losses, seem to be abating.
KKR completes $26 billion First Data takeover [Reuters]
Just how much of a “concession” on the part of Kohlberg Kravis Roberts’ was its agreement to put a maintenance covenant in the buyout loans for First Data. Yesterday’s Wall Street Journal reported it as a major triumph for the banks committed to making the loans, writing “KKR has blinked.”
That interpretation has been directly challenged by DealBook’s Michael J. de la Merced who began his item on the addition of the covenant with the words: “Kohlberg Kravis Roberts has not blinked.”
“K.K.R. appears to have agreed to a covenant without any real teeth,” de la Merced writes. “Calling the development a ‘concession’ is overstating the case, a person with knowledge of the discussions told DealBook. The $24 billion offering for First Data’s debt will still include pay-in-kind toggles, an investor-unfriendly kind of bond which allows interest payments to be made by issuing more notes.”
When we posted on the addition of a covenant yesterday, DealBreaker readers took a position largely consistent with DealBook’s interpretation. One fact that stood out to many readers is that the PIK-toggle seems to have stayed in place, allowing First Data to make interest payments on its loans by issuing new debt. KKR is unlikely to let a leverage ratio covenant render the PIK toggle ineffective, which implies that the covenant will have to be very loose to allow for the new debt.
So its possible that the covenant may be nothing more than what some would call “optics”—a change meant to make the deal appear better from the perspective of investors without changing the substance.
“And First Data can’t afford real maintenance tests either,” de la Merced adds. “Normally, if a company fails to meet its performance requirements, it must meet with its lenders, who can demand payment in exchange for a waiver. But because of its newly razor-thin margins, First Data would be hard-pressed to pay up if it failed to meet its earnings criteria.”
A Concession in the First Data Deal? Hardly [Dealbook]
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Posted in:
Citigroup
Cracking KKR
Private Equity Giant Shows Willingness To Make Concessions On Closely Watched LBO Deal
By John Carney
The banks have won the first big show down with private equity.
Last night several news outlets, including the Wall Street Journal, reported that private equity giant Kohlberg Kravis Roberts has signaled a willingness to include a financial covenant for the bank loan portion of the $24 billion of debt needed to finance its purchase of First Data.
First Data was largely viewed as a test case for some of the biggest, and riskiest, of the highly leveraged buyout deals that are scheduled to close in the next few weeks and months. The banks had been asking the private equity sponsors of the deals for concessions on the terms of the financing, saying it was having trouble syndicating the debt due to recent concerns about debt levels by many investors.
KKR Europe chief Johannes Huth has readily available completely made-up statistics to ward off those who contend that PE firms are just “financial engineers.”
From Deal Journal:
At a panel discussion in Frankfurt today, Huth said the private-equity firm earns most of its money — 60% of it actually — from improving the operations of companies it buys. According to Huth, 25% to 30% of the gains in its portfolio come from reducing debt at those companies. (The remainder comes from “multiple expansion,” or a broad increase in market values.)
The fact that a PE firm doesn’t earn anything by merely “improving” company operations, and that an operational improvement would in many cases lead to steady debt pay down (yet a separate category) and a multiple expansion on some sort of liquidity event, means that statistics like this are pretty much made up, because they can be defined any way the PE firm wants.
Since when is KKR so whiney anyway? From bad-ass barbarism to bitchiness is a long PR tumble. KKR should go back to raiding, looting, pillaging (I mean “operational improvement”), without remorse. There’s no law against financial engineering – the whining is all bruised ego at this point, or at least people trying to cling to low taxes on carry. You’re not saving the (cheerleader or the) world Kravis, or most business for that matter, get over it and be content with your billions, consistent returns, and impending golden shower of an IPO.
Financial Engineering at KKR? Never [Deal Journal]
