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Strategies & Market Trends : John Pitera's Market Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: John Pitera who wrote (7577)	2/19/2007 6:11:36 PM
From: John Pitera	Respond to of 33421

The Free Cash Flow streams getting small in LBO's-- they are pushing for the outer boundries of what will work. -------------------------------------------------------------- Programmed to Stumble? By ANDREW BARY THE IMPENDING LEVERAGED BUYOUT of Univision Communications (ticker: UVN), the leading Spanish-language broadcaster, will produce one of the most debt-laden capital structures of any major LBO in recent years. This heightens the risk for the company's buyers, including Madison Dearborn Partners, Texas Pacific Group and Thomas H. Lee Partners. The private-equity firms are paying $36.25 a share for Univision, which will result in a total purchase price of $14 billion, including debt. The deal is due to close next month. Univision shares traded Friday at $35.95. As a private company, Univision will carry $10 billion of debt, with the private-equity firms putting up $4 billion of equity. The projected interest costs on that mountain of debt may total around $800 million this year, about equal to the company's 2006 pretax cash flow of $803 million, based on data in a Univision filing. Even assuming some cash-flow growth this year, Univision may produce >b?little or no free cash flow after a projected $92 million in capital expenditures. "I've never seen a capital structure so levered," says one veteran investor in high-yield debt. Univision's debt is equal to 12.5 times trailing cash flow. Most LBO sponsors try to keep total debt at no more than six to eight times cash flow, while ensuring that annual cash flow equals at least 1.5 times interest expense. Univision admittedly is a special case. With its strength in the Spanish-language market, the company has been one of the best growth stories in media. The sale price of $14 billion is a stiff 17.5 times 2006 cash flow, double the valuation of big media companies such as News Corp. (NWS) and CBS (CBS). The Univision deal suggests that the LBO game is getting more crowded -- and more dangerous. Receptive debt markets have allowed LBO operators to get lots of low-cost financing, although the risks have increased along with the funds thrown at target companies. The Univision financing will include a $7 billion bank loan and $1.5 billion of eight-year junk bonds subordinate to that loan. Bloomberg News reported last week that the bank loan is expected to be "covenant lite;" it will put few financial restrictions on Univision. Even with scant protection, the bank loan is expected to carry a moderate yield premium of about 2.25 percentage points above LIBOR, a key short rate now at 5.35%. The junk bonds are expected to yield about 9.5%, high by current standards in the junk market, where many bonds yield 7% or less. Considering the risks, investors might not get a great deal, however. Univision will have the option of deferring interest on the junk debt, a reflection of its debt-heavy financial condition. Even with the onerous interest costs, the LBO firms plan to take an annual management fee estimated at $16 million this year. Moody's gave the Univision junk debt a highly speculative rating of single-B3, and Standard & Poor's weighed in with an even lower rating, triple-C-plus. Moody's cited a risk stemming from the current dispute between Univision and Grupo Televisa (TV) about programming that Televisa provides to Univision, which generates 36% of Univision's ad revenue. "Univision's highly levered capital structure limits flexibility to renegotiate the terms of the contract as part of any resolution of Televisa's litigation," Moody's said. Given Univision's debt-laden balance sheet, Univision may find some investor resistance when it starts an institutional "roadshow" for the junk deal. If investors balk, it could be a signal that some sanity is entering the overheated junk market.

To: John Pitera who wrote (7577)	2/23/2007 12:28:49 PM
From: John Pitera	Read Replies (1) \| Respond to of 33421

Subprime Index Falls Anew With Few Sellers,Measure Widens To Record Weakness By APARAJITA SAHA-BUBNA February 23, 2007; Page C8 A benchmark derivative index measuring subprime mortgage risk continued its widening streak, setting a fresh record of weakness. The riskiest BBB-minus portion of the current version of the ABX index widened by approximately one percentage point from Wednesday's high to 12 percentage points in afternoon trade. This means if a buyer and seller were to enter a new contract today, the buyer would now pay about $1.2 million each year to protect a notional amount of $10 million over five years. Market participants said that the sharp move yesterday was driven by a paucity of sellers of index protection after a recent spate of bad news around loans to home buyers with shaky or inadequate credit histories. Just one month ago, the index stood at 4.62 percentage points. The ABX index is influenced by 20 subprime mortgage bonds. The current incarnation references credit risk on mortgages that were underwritten in the second half of 2006. A new index, which is subdivided into five tranches ranging from the highest AAA slice to the lowest-rated BBB-minus portion, is launched every six months. In recent weeks, reports of further deterioration in the subprime mortgages fueled the weakness in the index. However, yesterday's move was primarily influenced by a shortage of sellers of index protection, said Derrick Wulf, a portfolio manager at Burlington, Vt.-based Dwight Asset Management. "This market doesn't always need a specific catalyst," he said. Buyers of protection include dealers on Wall Street, banks trading with their own funds, mortgage hedge funds and mortgage originators. The sellers primarily consist of Wall Street dealers and some hedge funds, according to market participants. The widening risk premiums come amid an outpouring of negative news around subprime mortgages. Moody's Investors Service said late Wednesday it may lower its so-called loan servicing ratings on subprime mortgage units of five lenders, including New Century Financial Corp. and NovaStar Financial Inc. as loan delinquencies rise. This week, NovaStar, a Kansas City, Mo., subprime mortgage specialist, swung to a fourth-quarter loss of $14.4 million, or 39 cents a share, compared with net income of $26.4 million, or 84 cents a share, a year earlier. This month, big lenders HSBC Holdings and New Century warned they would probably take bigger-than-expected hits from subprime mortgages. Treasurys Fall as Fears Over Inflation Persist Treasury bond prices were lower yesterday afternoon, though off their intraday lows, as new supply from a five-year auction and the aftermath of Wednesday's stronger-than-expected inflation data pressured the market. The benchmark 10-year note was down 10/32 point, or $3.125 per $1,000 face value, at 99 6/32. Its yield rose to 4.73% from 4.692% Wednesday, as yields move inversely to prices. "I think the market continues to be worried about the Fed's focus on inflation," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson in Seattle. Several Fed speakers -- Ms. Hurley cited St. Louis Fed President William Poole and San Francisco Fed President Janet Yellen in particular -- have emphasized continued vigilance on inflation this week. Their comments came after higher-than-forecast consumer inflation data for January. And the additional supply of Treasurys this week, with an $18 billion two-year note auction Wednesday and yesterday's $13 billion five-year note auction -- is adding to the pressure, Ms. Hurley said. Still, "there was not a terrible reception to the five-year supply," said Ian Lyngen, an interest-rate strategist with RBS Greenwich Capital. To some degree, instead of a broader shift in sentiment, Mr. Lyngen argued, the "modest correction" in Treasurys in yesterday's session represented a squaring of positions. The market's recent softness may elicit buying interest from investors waiting for a modest rise in yields, he said.