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Banks use discounts to tempt ‘vulture funds’
By James Mackintosh in London
Published: October 4 2007 20:04 | Last updated: October 5 2007 15:13
Investment banks are offering finance to “vulture funds” on improved terms if the money is used to buy debt from them, according to bankers and managers of the funds. Banks keen to shift a backlog of well over $200bn of leveraged buy-out debt are tying leverage for recovery, or vulture, funds run by hedge funds and private equity to the sale of the debt.
The financing amounts to a hidden discount, allowing the banks to minimise public discounts on LBO debt they are having to sell at below face value. But it could help to accelerate the clearing of the debt hangover, which has added to the credit squeeze by limiting bank willingness to make new loans.
“The banks are offering different terms depending on whether you take their loans or other people’s loans,” said one hedge fund manager who has just raised a recovery fund. “Most of the leverage being provided by banks is only being provided if you buy their loans,” said another.
The improved terms, typically via total return swaps, which package the financing and sale, are most widely available from so-called universal banks with access to deposits, fund managers said. Universal banks, such as Citigroup, Barclays, UBS or Credit Suisse, contrast with broker-dealers such as Goldman Sachs, Morgan Stanley or Lehman Brothers.
Bankers said there was nothing wrong with offering cheaper or longer-dated finance tied to LBO debt, with one comparing it to branded car loans. “Buyers have to look at the all-in costs of the package, the finance and sale price together,” he said.
Banks tying finance to the sale of such loans will remain exposed to potential defaults by borrowers, shifting from direct exposure to a company to exposure to a fund itself exposed to the company. However, they will be cushioned by the investors in the funds, who bear the first loss, as well as moving from exposure to a single company to a portfolio. By removing the LBO loans from their books they also free up capacity, allowing them to return to lending again faster than they otherwise could.
Goldman Sachs led the way with a recovery fund this autumn, raising close to $2bn to invest in LBO debt, structured credit and corporate bonds.
Copyright The Financial Times Limited 2007
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