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KKR Might Be Timing The LBO Loan Market

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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]