Sunday, June 5, 2011

Naked Capitalism Link of the Day, Saturday catch-up

Saturday's link, Private equity debt cycle is wobbling again, at the Financial Times:
At the end of 2008, private equity firms were contemplating $506bn in deal loans that had to be repaid by 2015. By the end of May, 59 per cent of that had been dealt with by means of repayments, defaults and extensions, according to figures from S&P’s Leveraged Commentary and Data. KKR, to take one example, has refinanced about 55 per cent of the $75bn of debt it has on the companies in its US portfolio.
Moreover, the “CLO” machine that financed as much as 70 to 80 per cent of the feverish buying last time around began to rev up once more. May saw a steady stream of new collateralised loan obligations, the structured financing vehicles that financed buy-outs the last time round. Indeed, May was the heaviest month for such issuance since September 2008, the month the financial world came crashing down with the implosions of Lehman Brothers and AIG. Some analysts expect CLO issuance to total $10bn this year, more than double last year’s $4bn issuance, LCD notes.
All the buy-out firms that paid too much for the companies they acquired and put too much debt on them have reason to be grateful that CLOs exist, since they made the buy-out boom possible. In most cases, managers of the CLOs cared little for the credit fundamentals of the firms in which they invested and cared a lot about yield and fees.
Because they were just happy to clip coupons and collect fees, these managers were willing accomplices when the private equity owners came to them for deals to extend the debts of their companies. At the same time, high-yield funds and bank loan funds were also happy to refinance deal debt, given the sizeable inflows. (emphasis mine)
Things may be about to change, however. Returns in high-yield and leveraged loans continue to be attractive compared with everything else. Absolute rates to finance leveraged buy-outs are lower than they were when KKR and TPG bought the Texas utility in the first place and the terms the banks are quoting mean that financing for deals is even more attractive than it was the last time round. Indeed, until this week, technicals in the larger market have appeared strong.
That portion in the bold accounts for almost all of the investment bank problems which led to the Great Recession.  For so-called masters of the universe, they were extremely short-sighted.  These people have no credibility with me, they are massively overpaid, and are a general drain on productive society.

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