Phorgy Phynance

Archive for the ‘Private Equity’ Category

High yield pipeline gets its first real test

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Even before things in credit markets went completely haywire, there were technical concerns about the building pipeline of new high yield issues that were feeding into CLOs, which were in turn spurring the LBO boom. My own quantitative analysis had shown that high yield was particularly vulnerable going back to September 2006 (which my models were unfortunately only completed in March-April). That is why I was so certain that July 16 would be a big day. That was the day Bear Stearns was to report their hedge fund losses.

I think we all know what happened after that, but I still think not everyone is aware of the huge buildup of high yield issues that have resulted from delays as brokers “hope” things get better. This has created a bifurcation in the primary market (which is essentially non-existent) and the secondary market. Just as holding of CDOs will eventually be forced to face the music, the high yield market will need to face the music and eventually issue some new bonds. That will (in my opinion) bring in a pretty clear “mark to market” in high yield and there very well could be another general repricing.

Apparently, next week is the first real test as First Data issues $24B of debt ($16B in loans and $8B in bonds)

All Eyes Are On First Data
September 10, 2007

If I were a high yield investor (which I’m not, so don’t take my armchair analyst advice too seriously), I would not be eager to get back in just yet. I think things will still get worse before they get better, but like they say “only monkeys pick bottoms”, so I would certainly be shopping for bargains, while keeping in mind that the definition of a “bargain” has changed. For example, the assumption of continued historically low default rates should be discarded imho.


Written by Eric

September 9, 2007 at 12:34 pm

More on CLOs and private equity

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The discussion over at Nuclear Phynance continues.

This morning, we are talking a bit about high yield spreads, CLOs, LBOs, and private equity. Here is my latest contribution

See? It is much more fun to have opinions on the future rather than the past. We will ultimately be able to see who is right rather than looking in the rear view mirror and say what idiots others have been.

Private equity is awash with cash, no doubt, so what are they going to do with it? My opinion is that it is not the intention of private equity to make current shareholders rich (duh!). They’ll only execute an LBO if they think there is profit to be made. Generally, you might think lower equity values would make a company an attractive LBO candidate, but what if the low equity value is because the company’s actual value is decreasing due to deteriorating economic and market conditions? PE will not be catching falling daggers. That coupled with increased financing costs will give PE limited options for investing the cash they are sitting on. If they don’t invest, pension funds and endowments that have gorged them with cash will begin extracting that cash to invest elsewhere. Why pay PE fees for treasury-like (or worse) returns?

The IPO rip cord worked for the partners at Blackstone, but the subsequent tanking will make other PE’s going public more difficult.

Time will tell

Written by Eric

July 25, 2007 at 8:27 am

Posted in CLO, Private Equity