Oaktree, BlackRock Plan Funds to Buy LBO Loans at a Discount
By Pierre Paulden and Jason Kelly
Sept. 28 (Bloomberg) -- Oaktree Capital Management LP, BlackRock Inc. and Eaton Vance Corp. are raising funds to purchase leveraged-buyout loans that banks are selling at a loss.
At least 11 firms are seeking more than $12 billion as banks court buyers for more than $370 billion of debt they pledged to finance takeovers. Citigroup Inc., Credit Suisse Group and Deutsche Bank AG already have reduced prices on loans by as much as 4 percent to lure investors.
Investment groups such as Los Angeles-based Oaktree Capital, which oversees $47 billion, and BlackRock in New York see a chance to profit because banks are stuck with loans they made before demand for below-investment-grade debt dried up in the past three months. The Standard & Poor's/LSTA Leveraged Loan Index fell 3.1 percent in July and August as record defaults on U.S. subprime mortgages drove investors away from all but the highest-rated securities.
``Banks overextended themselves and there is enormous opportunity,'' said Michael Hennessy, who helps oversee $6 billion at Morgan Creek Capital Management LLC in Chapel Hill, North Carolina. ``There was a credit bubble and now it's burst.''
Oaktree Capital is seeking more than $3 billion to invest in loans, said three people who have read the offering documents. BlackRock, the largest publicly traded money manager in the U.S., and Eaton Vance of Boston also are soliciting investors.
``Clients are clamoring for these opportunities,'' BlackRock Chief Executive Officer Laurence Fink said in a Sept. 11 presentation to investors.
Goldman, Lehman, KKR
Goldman Sachs Group Inc., the largest and most profitable U.S. securities firm, and Lehman Brothers Holdings Inc., the fourth-biggest, are each seeking about $2 billion to buy loans, according to investors who asked not to be identified because the fund raising is private. New York-based Kohlberg Kravis Roberts & Co., the buyout firm run by Henry Kravis and George Roberts, is putting together a $2.5 billion fund, four investors said.
Funds managed by Goldman and Lehman, both based in New York, may end up buying loans their firms made, and KKR may invest in debt used to finance its own LBOs, the people said.
Buyout firms, which typically acquire companies using debt for at least two-thirds of the purchase price, announced a record $613 billion of deals in the first half of the year, data compiled by Bloomberg show. The flow slowed to $167.4 billion since then as banks stopped providing credit until they sell loans already on their books.
Discounts Offered
The loans are typically below investment grade, or rated less than Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.
``The private-equity firms and banks may have more motivation to set up funds so the banks can offer financing to do more deals,'' said Martin Fridson, chief executive officer of FridsonVision LLC in New York, a high-yield debt research firm.
Officials at Oaktree, Eaton Vance, Goldman, Lehman and KKR declined to comment.
Banks are cutting prices to get loans off their books. New York-based Citigroup and a group of investment banks sold $1 billion of loans for automotive-supplier Allison Transmission at 96 cents on the dollar on Sept. 11 and found investors for an additional $500 million at 96.5 cents last week. The banks still hold $2.5 billion of the Indianapolis-based company's debt.
Citigroup, Zurich-based Credit Suisse, Frankfurt-based Deutsche Bank and Merrill Lynch & Co. of New York sold $9.4 billion of loans yesterday for KKR's $29 billion acquisition of Greenwood Village, Colorado-based First Data Corp., the largest processor of credit payments, according to people with knowledge of the transaction.
Sale Doubled
The sale included $7.6 billion of debt at 96 cents on the dollar and $1.8 billion at 97 cents. While the sale was almost double the amount the banks planned last week, they must still find buyers for $9 billion of bonds.
More leveraged debt may be offered in coming weeks as some of the biggest buyouts seek funds.
Citigroup, Goldman, Lehman, New York-based JPMorgan Chase & Co. and Morgan Stanley are financing the largest U.S. LBO, KKR and TPG Inc.'s $32 billion purchase of Dallas-based power producer TXU Corp. Banks led by Citigroup are behind Goldman and TPG's $27.7 billion buyout of wireless provider Alltel Corp. TPG, run by David Bonderman, is in Fort Worth, Texas.
Banks agreed to terms for deals such as First Data and TXU in the first half of this year, before defaults on mortgages by borrowers with patchy credit histories caused credit markets to dry up.
Sankaty, Onex
``The banks are holding transactions negotiated during an enormously liquid market,'' said Howard Tiffen, who oversees $10.5 billion of loans at Morgan Stanley Investment Management in Oakbrook Terrace, Illinois. The debt may turn out to be profitable investments, he said.
Investors said other firms opening funds include Boston- based Sankaty Advisors LLC, a fixed-income affiliate of private- equity firm Bain Capital LLC, which raised more than $1 billion; Lake Forest, Illinois-based Z Capital Partners LLC, which gathered $500 million; Ore Hill Partners LLC in New York, which brought in $450 million; and Arx Investment Management LP, a New York-based hedge-fund manager.
Officials at the firms declined to comment.
Executives of Onex Corp., Canada's largest buyout company, said on a Web cast with investors yesterday that after seeing loans being sold at discounts, they decided it was time to form a credit fund.
``Value investors smell opportunity,'' said Scott Page, co- manager of Eaton Vance's bank loan funds. ``These were the deals left standing when the music stopped, they are not toxic waste.''
To contact the reporters on this story: Pierre Paulden in New York at ppaulden@bloomberg.net ; Jason Kelly in New York at jkelly14@bloomberg.net
Last Updated: September 28, 2007 00:13 EDT |
