Locusts into Vultures 2: Funds in $12.5 Billion Debt Buyback Deal
Desperate to move off the books over USD 43 billion in leveraged loans - loans it couldn't securitize and unload when the global credit crisis hit - Citigroup has found the ideal buyer: the private equity firms whose buyouts generated the loans.
Apollo, TPG and Blackstone are reported to be close to a deal to buy USD 12.5 billion in "distressed" buyout debt, at the bargain price of what the New York Times has identified as "in the mid-80 cents on the dollar." This is lower than the USD 87 cents identified as the average trading price by a special Credit Suisse index, but more than the 70-80 cents that many other buyout loans are currently trading at.
Much of the debt comes from the buyout funds' own deals, including the Apollo/TPG Harrah's buyout, the largest private equity casino deal ever. According to the Times article of April 9, "Loans that supported buyouts by other private equity firms, like the takeover of First Data by KKR, are also expected to be included in the package", with Apollo buying half the debt and Blacksone/TPG splitting the rest.
Virtually all sizeable private equity firms have been successfully raising multi-billion dollar funds since the early days of the crisis to speculate in LBO debt. Leon Black of Apollo told the annual super Return Conference in Germany in February "You can get equity-type returns from debt instruments that may be a better play than pure equity right now, where you can't get leverage."
According to the April DowJones Private Equity Analyst, reporting on KKR's plans to soon launch a leveraged debt hedge fund, "All of the biggest buyout firms soon will be active in hedge funds, either directly or through joint ventures. But smaller players such as H.I.G. Capital Management, New Mountain Capital LLC and Quadrangle Group are looking for a piece of the action, too – albeit more quietly. Unlike the big guys, who are mostly answering investor demand for a ‘onestop shop’ for alternative investments, the mid-market players are simply seeking to put information garnered in the course of everyday due diligence and portfolio management to work in new and creative ways. There are many ideas and potential investments that arise during the course of our business that fall outside of our views of a PE fund,” said Kevin Callaghan, managing director of mid-market buyout firm Berkshire Partners, which occasionally takes stakes in publicly traded companies. “How can we take those ideas and put them to work?”
According to the same Dow Jones report, US private equity firms raised almost one third more money in the first quarter this year than in the same period in 2007 - USD 58.5 billion vs. 44.9 last year. Fundraising for buyouts, however, fell sharply as a percentage of overall fundraising - USD 27.6 billion in 32 funds, as against 35.2 billion in 34 funds in 2007.
As noted in an article on this site published on October 1,2007, "The emergence of massive funds specializing in LBO debt (one hedge fund has already raised USD 7 billion) raises fundamental regulatory issues. The investment banks who have been collecting the fees and securitizing and peddling the debt to fund buyouts now find themselves unable to offload it, except at a heavy discount, to the very funds whose buyouts created the debt in the first place. Picking up heavily discounted buyout debt could bring massive rewards to funds who lost out in bidding wars which drove purchase prices to ludicrous earnings multiples – and leave them in possession of the company in the event of a default. All the classic conflict of interest issues raised by the buyout process are magnified and intensified here."