Ed Huntress wrote:
"John R. Carroll" wrote in
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Ed Huntress wrote:
"John R. Carroll" wrote in
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Ed Huntress wrote:
"John R. Carroll" wrote in
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Ed Huntress wrote:
"Hawke" wrote in message
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snip
Maybe. Maybe not. Nobody really knows the underlying values of these
deals.
They might be UNDER valued.

OK, I'm probably going to be asking obvious questions here, but I'm
not counting on my own interpretations anymore. If the targets of
these deals, the companies that were bought out in the LBOs, haven't
lost value, why are the banks having to discount the loans back to
the original borrowers? Is it just because they need cash that badly,
or what?

A crisis of confidence, mainly by their share holders and the general public
on the one hand and the desire to be the next guy with a silver bullet to
roll out on the other.
This really is a "clubby" environment Ed.



The money is owed to the banks by the managers that did the LBO's at
this point. When the transactions were complete, the PE firms
shopped the paper to the highest bidder and recovered their
liquidity.

I'm losing track of which paper is which. Is this debt that was
incurred by the newly bought-out companies?

Exactly.

When someone publishes "buying back their own debt" you hear or percieve
somethiing akin to a corporation retiring debt early or going out into the
market and buying back shares. This isn't like that and is why the practice
is known as "double capping" or more crudely as "double tapping".

In the "Old Days", LOL - old days, KKR for example, would gobble up a
company like Beatrice. The would have done this with what is known as a
bridge fund or bridge financing. Bridges are just that in finance, they are
not meant to be permanent and God help the poor ******* that can't "take
out" a bridge.

Junk bonds were once the take out and sometimes still are but when they fell
out of favor. The KKR's of the world had done well when the could access
money and the banks took a real interest in participating. We've been
through the changes in the banking laws ad nauseum and I won't patronize you
or George. The banks found a way into this very lucrative market when banks
could be Investment Banks and Investment Banks could be banks and PE firms
had a much better way to take out bridge financing. It's also something that
had previously been against the law and called self dealing. I know guys
that went to federal prison twenty years ago for what is a legal practice
today.

A commitment from a bank beats a "Highly Confident" letter any day of the
week so LBO's were done with the foreknoweledge that permanent financing
would be forthcoming and this financing relied on the representations of the
IB/PE community, which was now legally intermingled with actual banks,
rather than any fundamental understanding or valuation of the deals being
done. Banks first competed to get a look at a deal by making financing
commitments and they would then duke it out in a battle of rates and fees to
structure the final, permanent funding solution.

The banks were, and still are, betting on the track record of the players,
not the values or fundamentals. They had a HUGE amount of 401K and other
pension related inflows of CASH to dispose of. Banks HATE cash. It is their
enemy. Nobody wants to have to explain a big wad of unproductive cash to the
share holders. Also, there isn't any compensatory upside for the CEO or
other officers of a bank. Their bank may have a stronger reserve position
and be more liquid but that doesn't get anyone a big bonus. It gets them
yelled at, maybe in court.

Anyway, they bought everything in site and let me make it clear that when a
bank makes a loan it's a purchase.
They create a revenue producing asset. They also bought huge bundles of
mortgage backed securities and other instruments. High yield stuff long
term - every bit of it. They "hedged" with what I've taken to calling
"uninsurance".
Like the "UnCola" you know.
They bought a lot of UnCola. Unlike Seven-Up "uninsurance" hasn't any real
value but they bought it.
"Uninsurance" really is insurance and it's sold by big RE but it isn't
called insurance because that industry and those products are regulated and
reasonably transparent. We are watvhing the end of that movie right now.

The ongoing mortgage backed securities and credit swap fiasco brought the
"quality" of their entire investing process to light and into question. "How
stupid can a guy be" became a genuine question.
They couldn't figure out what their mortgage backed loan portfolios were
worth because the were tied to credit default swaps that were looking
increasingly dubious. Why on earth would anyone think they had done any
better with LBO placements?

That is their problem. Shareholders and the markets have lost faith in the
stated value of the banks assets. There are a few excepted products, but not
many. There hav also been real and measurable losses and more than a few are
really PO'd.

OK, Houston - Bear Sterns has a problem. The reaction of the US Dept. of the
Treasury is to get together with the other central banks and FLOOD the
markets with liquidity rather than allow a rational corrective action and if
that weren't enough, the added sop of opening the discount window and
extending, and in the end eliminating, the repayment term added fuel to a
fire that was already pretty hot. This new credit facility was also
extended, and for the first time ever, to the Investment Banking community.
THAT bunch is controlled by the PE folks. It's incest at it's finest
especially considering the end game and Bear Stearns.

Instead of propping up mom and pop's mortgage, all that happened was that PE
firms got another huge influx of cash.
All of that money has to go somewhere you know and the actual banks were
desperate to clean up their balance sheets of any class of asset that was
perceived, notice carefully my use of the word "perceived here, as dubious,
so they hooked up with their brothers and cut a deal that made them appear
prudent and hard headed pragmatists. In fact, they are throwing away
significant value as fast as they can shovel loans out the door and when
they do, they fund the discount with money that the worlds various central
banks have so thoughtfully provided and that hit shows up in a loss in the
value of shareholder equity. Not only that, these same shareholders - the
ones that were screaming for blood - are now standing on their chairs
applauding this behavior because they have managed to monetize their
possible future loss on the original assets involved. This is really crazy
because all they have really done is pay a substantial fee to put someone
elses name on a loan document. Crazy becomes insanity and irrational because
unlike the original creditor - a business with some underlying value - they
now have little more than a promise to pay that probably isn't higher
quality and might be lower.
It looks like progress and stability but be ready to see these guys look
back at their new lons and realize they know less about thier quality than
they did about the original instruments.

I'm listening to a story on the news as I write this, about "creepy
bloodsuckers." They're talking about bedbugs but it sounds like they
could be talking about private equity firms. g

A better analogy would be a truly ugly/nerdy guy walking up to the hottest
woman in the place and telling her he didn't want a relationship, just sex
and having her take his hand, smile and head off with him. His reaction
would be utter and absolute disbelief. Life just doesn't work that way, but
he'd be laughng his ass of at his audacity and good fortune for the rest of
his life even if he never saw his "date" again. And listen. What would the
down side have been? That she'd have blown him off, IOW - nothing.

It's just like that.
Speed dating on steroids.

--

John R. Carroll
www.machiningsolution.com