Distressed Securities

Valuations are the big issue in bailout

Jim Kim — Thu, 25 Sep 2008 11:58:25 -0400

Let's say that the government agrees to some sort of bailout. At some point, the RTC-like entity will use taxpayer money to buy distressed securities. And therein lies the big challenge. How do you value the securities? It's a bit like an IPO. Price it too high--and the buyers (taxpayers in our case) lose. Price it too low--and the sellers (banks) lose, especially if they are carrying them at a higher value on their books. You pretty much have to go on a security-by-security basis, looking deep into the underlying mortgages, the basic building blocks. The New York Times notes a wide range of valuations, from the 22 cents on the dollar implied by the Merrill Lynch-Lone Star deal, to the 60 events at which Citigroup carries some assets. It all depends on the specific securities. Bill Gross's offer to use PIMCO's bond analysts is starting to sound better. But let's face it, trying to pick prices is like picking stocks. Taxpayers could really get killed on some deals. So this may make the idea of equity more logical. Inevitably, some deals will sour for taxpayers. But equity stakes in aggregate would offset the losses.

For more:
- here's a New York Times article on valuations

Sometimes a deal can really work out

Jim Kim — Sun, 29 Jun 2008 08:33:04 -0400

TheDeal.com offers an interesting look at a deal that's working out; it may end up a rare example of success. Recall that Verizon Wireless agreed to buy Alltel from TPG Capital and Goldman Sachs Capital Partners on June 5. The original sponsor-led buyout was inked back in May 2007, when the private equity world was booming. But then came the credit crunch, and about $23 billion in leveraged loans hung at the likes of Citigroup and, ahem, Goldman Sachs. This past spring, the debt subsequently was sold at a big discount to a group of private equity distressed securities funds, including a fund from TPG. Since then, the value of the bonds likely has risen. When Verizon decided it still wanted to buy Alltel at a small premium, it seemed like a charmed deal for all. There's more to the deal, but you get an idea of how things can work out for some sponsors. This will not likely be repeated. The key is to have a portfolio company that is really performing. There will be fewer of these.

For more:
- here's the item from TheDeal.com

Related Article:
Private equity firms win with Alltel deal

Ready for 'write-ups' in the second quarter?

Thu, 15 May 2008 06:59:56 -0400

Breakingviews notes another reason to think that the worst of the credit crisis may have passed. Credit default swaps on collateralized debt obligations and leveraged loans have staged impressive rebounds. Prices have really rebounded. That raises the prospect of "write-ups" for the second quarter, which would certainly help offset expected weakness in other areas. Who'd have thought that just a few quarters ago. Still, there's no point getting too excited now. The article notes that the rebound has affected all securities; there are plenty of stinkers in plenty of portfolios. As well, the rebound may have been a bit of a dead-cat bounce, if you know what I mean. Still, there seem to plenty of distressed securities buyers out there. We'll see where this mini-rally leads.

For more:
- here's the Breakingviews article

ALSO NOTED: Morgan Stanley to sell MSCI shares; WaMu spurned JP Morgan in favor of TPG; and much more...

Thu, 10 Apr 2008 06:59:50 -0400

Company News:
> Franklin Resources suffers withdrawals. Article
> Morgan Stanley to sell MSCI shares. Article
> Carlyle raises $1.4 billion for distressed securities fund. Article
> Merrill Lynch to focus on costs. Article
> JP Morgan Chase says it bought more Bear Stearns shares. Article
> Bank of America launches debit card for teachers. Article
> WaMu spurned JP Morgan in favor of TPG. Article

Industry News:
> Bill Miller criticizes Microsoft's gambit. Article
> Fitch downgrades more mortgage bonds. Article

Regulatory News:
> Greenspan lashes out again. Article

And Finally... High school seniors get F in finance. Article

Buyout firms invest in own debt

Wed, 09 Apr 2008 06:59:58 -0400

Well, you can't fault them for their conviction. Three big private equity firms--Apollo Management, TPG Capital and the Blackstone Group--are said by the New York Times to be close to a deal to buy about $12.5 billion in leveraged loans for Citigroup. The twist is that the portfolio includes some debt used to finance deals by the firms. Apollo, no stranger to high-yield debt, is reported to be the biggest buyer, meaning this is a decent bet that the big boys think the worst may be over, and that these loans may recover in value soon (if they haven't already). We'll likely see a lot more of these deals soon, as all those newly formed distressed securities funds put their funds to work.

For more:
- here's the New York Times article

Related Articles:
Leon Black suffers most among PE kings. Leon Black article
Buyout debt tanking fast. Buyout article

SPOTLIGHT: Hedge funds betting on distressed debt

Mon, 07 Apr 2008 06:59:52 -0400

Hedge funds have got to make money, whether the markets move up or down. So it's not surprising that the majority of them are loading up on distressed securities. Many also are expecting more blow-ups in 2008. Article