• 24 Jun 2008 at 4:34 PM
  • Fed

The Fed Put In Loan Provisions

Federal Reserve And Loan Agreements.jpgCorporate loan agreements are being drafted to include an express provision allowing lenders to transfer their loans to the Federal Reserve, a loan expert tells DealBreaker. The Fed has been accepting a much broader range of collateral in exchange for short-term loans through what is known as Fed “repos.” In a repo, dealers bid on borrowing money versus various types of general collateral.
The new provisions seem to anticipate the possibility that banks might use corporate loans in repos, accessing cash from the Fed in exchange for the credits. In the past the assignment provisions of loan agreements that governed transfers typically did not expressly permit transfer to the Fed. Instead, they permitted assignment to others commercial banks, insurance companies, investment or mutual funds or other entity that is an “accredited investor” under securities laws. The new provision illustrates the ever more pervasive role the Fed has in the current credit markets.

  • 19 May 2008 at 11:49 AM
  • Loans

PIK Toggles And The Credit Crisis.

Despite the now two-month old rising stock and some signs that the frozen credit markets have unthawed, bad news continues to pour out of the credit markets. This morning the Wall Street Journal reported that a number of companies that issued debt with easy terms are now making use of those options to conserve cash. In particular, at least seven companies have exercised the option on $2.4 billion in bonds that lets them make interest payments by issuing additional debt instead of shelling out cash.
The PIK-toggle was extremely popular with private equity borrowers in the height of the buyout boom, and there were few banks that could resist offering it to the big buyout firms that were spilling deal fees like a oil-tanker in Alaska. They foresaw the cash-management advantage it would give them, allowing them to preserve capital when times were tight or threatening to tighten. With a pull-back in consumer spending widely anticipated–consumers have been going so strong for so long but plummeting confidence, rising prices, dropping home prices and credit card debt are thought to start dragging down spending soon–it makes a lot of sense for companies like Claire’s, the costume-jewelry retailer taken private a year ago by Apollo, to conserve cash.
Of course, investors holding the bonds are howling. More importantly, with the bonds kicking back additional debt instead of cash, the PIK-toggle could put further strains on the credit market. Investors already stuck with bonds trading at distressed debt prices are unlikely to be willing (or able) to lend into new deals. Without cash coming in, there’s less to push out, meaning the PIK-toggles could extend and deepen the credit crisis.

PIK and Roll: Companies Seize On Perks of Loose Lending Terms
[Wall Street Journal]

  • 12 Feb 2008 at 11:45 AM
  • Loans

Is The Syndicated Loan Market On The Edge Of A Major Disruption?

“All of us [banks] are really in the moving, not the storage, business.”
With those words the world learned yesterday that Credit Suisse had sold off its exposure to three closely syndicated loan deals—the buyouts of Harrah’s, Intelsat and Alliance Data Systems. Many in the syndicated loan business were taken aback that Credit Suisse had jumped the gun and sold off its exposure without consulting other syndicate members. Although the details are unclear, the effect today seems to be that others are following suit, bringing to market debt in a way to some say resembles a panic.
“There’s a real panicky feel out there. It’s become a game of hot potato,” one syndicated loan market veteran told DealBreaker.
There’s a lot of sensitivity around this issue, and many market players are declining to comment on it at all. There’s talk that Clear Channel loans commitments may be in trouble. We’re still digging.
Update: “80 is the new 90″ for leveraged loans, FT Alphaville reports. This is putting pressure on CLOs, which are falling through the floor. Banks hold a lot of CLOs, especially the triple A CLOs they thought were the safest bets but may turn out to be worth far less than anticipated. They haven’t disclosed much of these positions, according to FT Alphaville, because they were fully hedged. But here’s the catch–they were fully hedged with swaps from bond insurers.
“Thus as monolines totter, banks are having to writedown the value of the CDS, and so add CLO exposures onto their balance sheets. Just at the wrong time – as CLOs’ paper becomes more distressed. While losses won’t be realised as severely as with RMBS, rating downgrades to CLO paper may well require banks to stump up extra regulatory capital at a time when they can least afford to,” FT Alphaville reports.

  • 17 Oct 2007 at 4:01 PM
  • Loans

A Recovery For LBO Debt?

LBODebt.jpgAre buyers for LBO debt back? Monday’s $11.5 billion debt offering for Energy Future Holdings, the company that is taking over for TXU, reportedly went much better than many expected. The underwriters—Citigroup , J.P. Morgan Chase, Goldman Sachs, Morgan Stanley, Credit Suisse and Lehman Brothers—are said to be offering the loans almost at par and the $11.5 billion is about twice what they originally planned to offer in the first round. S&P says the debt will be sold at 99.5 cents on the dollar, much higher than many loans have recently priced and much higher than the underwriting group expected less than a week ago.
Apparently, buyers have in fact been won over by the “toothless” maintenance covenant the KKR agreed to add to the debt.
The debt is just a small portion of the total debt for the TXU deal, and banks are still struggling to place LBO debt they have sitting on their books. Where they have succeeded in selling the debt, they’ve often had to offer the loans at discounts that price the loans at 97 cents to 95 cents on the dollar.
Last week Goldman sold a $100 million piece of the $2 billion term loan used to finance KKR’s acquisition of US Food Service, according to the Deal’s David Carey. Those loans had been sitting around since the deal closed in early July. We haven’t been able to get a hold of the pricing on that one, however.
Other recent loan placements have come with higher discounts, but not as high as many anticipated. Loans for the acquisition of First Data priced at between 96 cents and 98 cents on the dollar. Loans for the private equity buyout of Allison Transmission sold for 96 cents. That still stings for the banks but doesn’t quite create the potential upside that many so-called “vulture funds” were hoping for.
Indeed, Mike Flaherty has a story in Reuters indicating that this unexpectedly swift recovery in the loan market has some “questioning the wisdom” of LBO debt funds reportedly in the works from Citi, Goldman, KKR and TPG. The idea behind some of these funds is typical financial hucksterism: if you lose a dollar going in, make sure you make two bucks on the way out. So if you’re a bank selling LBO loans at a discount, might as well buy some up and try to participate on the upside of the discounting. But if you’re placing the loans at close to par, maybe you don’t need to a vulture fund to capture the potential upside.
But, then again, Bernanke, Paulson and the Beige Book have all been making dire sounds about the economy. (Yeah. Yeah. Books don’t make “sounds.” Whatever.) And if the economy slows and the prospects for the portfolio companies seem darker, this early recovery for the credit markets may seem like wishful thinking. And, of course, this may open up opportunities for the vulture funds.
Of course, even the vulture funds rest on rosy assumptions about the economy and the prospects of borrowers. If things get real bad, vulture funds started as pseudo-hedges against losses in syndication may end up multiplying losses through the use of leverage to buy the loans.
TXU debt not such a hard sell [The Deal]
Banks work through loan overhang [Dealscape]
New debt funds get off to a tough start [Reuters]

  • 10 Oct 2007 at 1:36 PM
  • Citigroup

KKR Might Be Timing The LBO Loan Market

KKRIPOPULLED.JPGThe 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]

First Data Buyout Loans: Signs Of Life In The Loan Market

More news from planet LBO. Despite the rocky news on Archstone this morning, things are looking up this afternoon. The banks financing Kohlberg Kravis Roberts & Co. buyout of First Data Corp began selling around $10 billion of the deal’s bank loans.
As predicted, the loans sold at a discount. But at 96 cents on the dollar, the banks seemed to have little trouble placing the loans. Most have now been purchased by investors, DealBreaker can report.
The success of the First Data loan sell-off is being greeted as a welcome sign that there’s still life in leveraged loan land. “It’s a significant event on the road back to normality,” a London based hedge fund bond manager tells Bloomberg. “It shows that investors at least will accept a market clearing price and that wasn’t the case a month ago.”
KKR Banks Selling $10 Billion of First Data Loans [Bloomberg]

  • 27 Sep 2007 at 12:32 PM
  • Banks

Archstone’s Bank Loans Going Nowhere Fast

archstonesmithlehman.jpgThere’s no doubt that Planet LBO is a calmer place now than it was through much of the summer. But it’s not exactly terra firma yet. One of the shakiest deals in the pipeline is the buyout of real estate investment trust Archstone-Smith Trust. Lehman Brothers and Tishman Speyer are putting just $500 million of their own money into the $21 billion deal, with the rest coming in the form of bridge equity and debt.
Yesterday Lehman Brothers and Bank of America began their attempt to sell $3.15 billion of the $4.96 billion bank loans financing the debt. The loans consist of a $750 million revolver and a $2.4 billion term loan, each priced at 300 basis points over LIBOR. But word is that they are running into resistance from investors who are surprised the debt is not discounted more heavily.
Reuter’s Jonathan Keehner reports that banks are offering the term loan at 99 cents on the dollar, and this has some would be investors balking. As Keehner gently puts it, the one cent hair cut prices the loans substantially “above where other recent buyout financings have closed or been discussed.”
Not everyone is being so delicate.
“Archstone is a good company, it’s got great assets, and bankers probably thought they could sell at this price,” said a buyside analyst tells Keehner. “But my initial view is that a lot of deals are coming in at the mid-90s, and this is coming in at 99 cents on the dollar. It looks rich to me.”
We’re told the situation is beginning to look hopeless. And part of the problem may be Lehman’s conflicting interests. As both the buyer and one of the lead lenders—a dual role that many banks considered a win-win situation in happier times—Lehman may have put itself between a rock and a hard place.
Let’s go to the Keehner tape again, this time from Reuter’s Dealzone blog. “Either way Lehman takes a hit: as a principal, renegotiating on any terms could hurt potential profits. But by also banking the deal, Lehman otherwise risks having the debt clog its balance sheet or sold at a loss,” Keehner writes.
Archstone loans appear priced at pre-crunch level [Reuters]
Lehman’s double trouble in Archstone [DealZone]

covenantliteloansyndication.jpgGoldman Sachs and other underwriters are attempting to syndicate $775 million of covenant-lite term loans, Reuter’s Mike Flaherty reported last night. The loans were made to fund the buyout of Laureate Education at a spread of 325 basis points over Libor, and were fully funded by the underwriters at the close of the deal. Now they are testing the strength of the secondary market for the so-called Cov-Lite loans, which have gone out of favor with many investors.
Cov-Lite loans were a product of the recently deceased extravagant credit market. Unlike traditional bank loans, they are stripped of nearly all of the covenant restrictions that lenders typically rely upon to keep track of the financial condition of borrowers.
“Restriction-free loans used to be the rage, and debt investors couldn’t get enough of them during the LBO frenzy. But debt investors got spooked by the subprime mortgage mess, and Cov-lite, as it became known, went the way of the dinosaur (at least for now), right there with its pal Pik-Toggle,” Flaherty writes.
Unlike the financing for the big buyout deals that are still waiting to close, such as KKR’s acquisition of First Data, the Laureate deal has already been funded, leaving the lenders with no way of pressuring the borrowers into accepting more stringent terms. The loans will likely be sold below par, leaving the original lending syndicate with losses. The depth of the discount, however, may be a sign of the market’s appetite—or lack of appetite—for the loans in the pipeline deals that lenders have committed to make but have not yet funded.
In short, many are looking at the Laureate syndication to demonstrate just how screwed the banks may be on the buyouts scheduled to close later this year.
Goldman to be educated on Cov-Lite appetite [Reuters]