Let's not forget Sy Harding :)
RED FLAGS ARE STILL FLYING IN DEBTLAND! July 20, 2007.
A couple of weeks ago I wrote that it's been a long-time observation that the number of Initial Public Offerings (IPOs) is always at high levels near stock market tops. That made me wonder if it was therefore significant that IPO activity reached a record in the first six months of 2007, with $132.2 billion in new offerings, a 23% increase over the same period last year.
It is also a fact that the peak in IPOs is frequently marked by a giant deal that doesn’t go so well. So I wondered if Blackstone Group’s huge IPO, which failed to attract follow-on buying, was also a signal of a top for IPOs. And I wondered if Blackstone’s subsequent ostentatious purchase of Hilton Hotels, with a 32% premium over Hilton’s trading price, might signal a top for leveraged corporate buyouts (LBOs), which have been supplying so much liquidity to the stock market.
And there were indications in both areas this week that the good times for IPOs and corporate buyouts might indeed be ending.
The Blackstone Group IPO continued to look like a poor deal for those who bought into it. Having gone public at $31 a share, and as is typical, surging up to $35 the first day the shares were available to the public, the stock immediately headed south. It plunged further this week and is now selling at just $26, 25% below its close on the first day of public trading.
Two new high-profile IPOs struggled this week. The offering of MF Global Ltd by its owner giant hedge-fund Man Group, plunged 8% in its first day of trading. In London an IPO offered by hedge fund Third Point LLC was delayed Thursday after it failed to even sell out its initial offering to institutions, raising only $525 million of its $690 million target.
In that other area, leveraged corporate buyouts (LBOs), even huge deals have been easy to put together over the last 12 to 18 months. But I warned in this column two weeks ago, “Liquidity in the form of the easy money that has been making it all possible is drying up. Banks and other lenders, under pressure from regulators, and their own belated awareness of the risks they have been taking, are becoming more cautious, raising interest rates, and tightening lending standards.”
An indication that leveraged buy-outs may indeed also be peaking could be seen in the problems encountered this week by a couple of high profile LBOs. New York hedge-fund Cerberus Capital Management is buying out Chrysler in a $40 billion deal. And Kohlberg Kravis Roberts & Co. is acquiring Alliance Boots, a drug store chain in England , for $18 billion.
The way these deals usually work is that a bank, or more often a group of banks, commit to financing the deals. They then re-sell the debt to investors in the form of corporate bonds or corporate debt obligations (CDOs).
But the banks on these two deals anyway are unexpectedly running into problems finding investors to buy the debt. They are being forced to sweeten the terms by paying a higher interest rate on the bonds, and even then face delays in getting them sold.
A few months ago the banks would have said this is the deal, take it or leave it, and investors would have scrambled to get their share. Now the heightened awareness of the risk in the debt/credit bubble is making investors more wary, more risk-averse, and the deals are getting harder to finance.
It puts banks in a potentially precarious position. At the present time banks are sitting on commitments of roughly $220 billion in LBO deals in the U.S. , and $50 billion in Europe . If they have trouble re-selling the debt to investors they can get stuck with it themselves, a risk exposure not intended when they committed to finance the deals. It’s expected they will be able to make most of their current commitments by offering to pay higher yields on the debt, cutting into their anticipated profit.
But you can be sure that the times they are a’changin’ in the land of easy money.
It also happened this week that Bear Stearns announced that its two hedge-funds, which shocked the stock market by coming close to going belly-up a few weeks ago, are virtually worthless. And that in spite of the extra billions the banks put in to try to rescue them and protect their loans. As you probably recall, those hedge funds hold highly leveraged positions in mortgage-backed securities, which have been dropping in value as home-owner defaults on mortgages rise.
The announcement sure did nothing to assuage growing concerns regarding the record level of all types of highly-leveraged debt, be it in home-mortgage-backed securities created in the housing bubble, or corporate debt obligations created in the craze to finance leveraged corporate buy-outs.
Sy Harding is president of Asset Management Research Corp., publisher of The Street Smart Report Online at www.StreetSmartReport.com and author of 1999’s Riding The Bear – How To Prosper In the Coming Bear Market! |
