How do you pull a bunch of LBO commitments off of your balance sheet? Sell them to the borrowers, and finance the transaction. How does that pull the debt off your balance sheet? Denial, my friends, ain't just a river in Egypt.
Citigroup sold $8 billion of the debt to private-equity firms this month only after giving buyers $6 billion of financing at cheaper rates than it can borrow itself, according to people familiar with the transaction, who declined to be identified because the terms aren't public. Deutsche Bank AG and Royal Bank of Scotland Plc are also offering credit to buyers to help cut their holdings. (Emphasis mine).
Banks escaped about $65 billion of LBO commitments in the past four months in part by lending money to private equity firms such Blackstone Group LP's GSO Capital Partners and Apollo Management Inc. Wall Street is getting rid of the debt individually, in packages or placing it into structures such as collateralized loan obligations, which pool loans and slice them into pieces with various ratings to sell to investors.
"They're substituting one credit for another but they're still ultimately on the hook for the debt,'' said Robert Willens, a former managing director Lehman Brothers Holdings Inc. who runs a tax-advisory firm in New York.
The rest of the inventory was reduced because acquisitions such as Blackstone's $6.6 billion of Dallas-based credit card processor Alliance Data Systems Corp. were canceled, eliminating the bank commitments.
By offering to finance the sales, banks can receive higher prices for the loans.
Now maybe it's just me, but providing loans at rates lower than your own cost of capital to firms to buy your loans sounds, shall we say, uniquely Wall Street. Then again, perhaps the increased price financed debt purchases commanded made up the difference. If nothing else, this is an interesting data point for how desperate banks are to shed the debt, and what effects fire sales have on price (i.e. very and brutal).
UPDATE: One DB tipster indicates that some loan financing deals (that sounds funny, doesn't it) are leveraged up to 10:1. Ouch.
Pandit's `Closer to End' Means No Escaping LBO Loans [Bloomberg]