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Strategies & Market Trends : The Residential Real Estate Crash Index -- Ignore unavailable to you. Want to Upgrade?

To: Lizzie Tudor who wrote (108676)	3/9/2008 7:45:28 PM
From: Lizzie Tudor	Respond to of 306849

Carlyle Capital's comeuppance: high leverage proves onerous March 7, 2008 PICKING CCC AS YOUR ticker symbol when you are listing a fund that invests in debt seems a little like tempting fate. But that is what private-equity shop Carlyle Group did when it floated Carlyle Capital Corp. in Amsterdam last year. The fund invests in AAA-rated bonds backed by Fannie Mae and Freddie Mac, the U.S. mortgage giants that carry an implicit government guarantee. But with debt funding a portfolio 32 times as big as the fund's net assets at the end of 2007, there wasn't much cushion against the margin calls that are now coming in. Many hedge funds borrow heavily, but banks are increasingly cautious about lending. If a fund's creditors decide they want to offer less debt or hold more collateral against trades, it can lead to forced asset sales. If the fund's trades happen to be losing money, too, the result can be a vicious spiral. That is more or less what happened at structured-finance fund Peloton Partners last week. CCC is struggling to meet margin calls from financing counterparties. Its $21.7 billion portfolio was supported by just $670 million of net assets at the end of last year. Carlyle Group has lent the fund some money -- a credit facility recently raised to $150 million -- to help ease its cash crunch. The fund also held back on paying a dividend last quarter. And it says it has sold $1 billion of assets since August. All that should have cut its effective leverage somewhat. But prices for the traditionally ultra-safe "agency" mortgage bonds the fund invests in have been sliding. Hedge funds -- in contrast to investment banks -- may have avoided toxic subprime-mortgage exposure. But as credit concerns spread, more of them may be affected, especially if they face pressure to deleverage at the same time. Fund boss John Stomber said in CCC's 2007 annual report that he saw small price declines as "contrary to normal price movements for our securities relative to interest rates." In hindsight, that sounds a tad unconcerned given the extraordinary situation that was already unfolding in credit markets. He is now working toward "more stable financing terms." CCC's investors, who knocked 64% off the fund's share price, must be worried that it could be too late. British Airways British Airways has finally admitted it won't be achieving its holy grail of a 10% operating-profit margin next year. With oil trading above $100 a barrel and the global economy slowing down, that is no great surprise. The U.K. airline now expects something closer to 7% next year, after a one-off cost of moving to London Heathrow's Terminal 5. But most analysts had already penciled this into their forecasts, and investors were expecting things to get pretty hairy. BA's shares have already lost nearly a quarter of their value since January. The real mystery is why the airline is still so upbeat on the number of passengers paying premium prices to travel, a group that accounts for the bulk of BA's profit. Deal volumes have plummeted this year, which likely means fewer bankers are catching the red-eye across the Atlantic. With domestic growth slowing down on both sides of the Atlantic, and the credit crisis rumbling on, the trend will probably worsen. Meanwhile, airlines are piling more capacity onto the North Atlantic route. None of this bodes well for ticket prices. So the bad news is probably not over. True, BA is in a better position than most to weather the storm. Its net debt is down sharply from a peak of £5 billion ($9.95 billion) in 2003, giving it some headroom. The airline is bullish enough to talk about pursuing a bid for rival BMI, a deal that would shut out its rivals from valuable Heathrow runway slots. And the shares look cheap: they are trading at just over six times Citigroup's estimate for 2009's earnings, compared with a historic figure of 10 times for European national airlines. Even so, the momentum still looks to be on the downside. Willie Walsh, BA's chief executive, had asked investors to judge his performance against the 10% target. He might just achieve it this year. But it will probably be quite awhile before BA gets near it again. Reed Elsevier When the hottest auction of the moment involves a magazine called Construction Equipment, it is safe to say the deal market has dried up. Still, at least six private-equity firms are apparently circling the sale of U.K. publisher Reed Elsevier's slow-growth, or no-growth, business titles. That would make it one of the first competitive, private-equity-led auctions since the credit crunch. It is possible the supposed feeding frenzy is just a lot of hype. The potential suitors may be trying to get their names out to suggest to investors they are still busy despite a financing drought. Or Reed, which has seen rivals Informa and United Business Media turn their noses up at the auction, might be trying to stir up the appearance of a competitive sale. Most likely, it is a combination. There is doubtless some interest in Reed Business Information, but it won't be an easy deal to do. For starters, its titles are under increasing threat from Internet rivals. Only about 30% of the group's £906 million in revenue was Web-related last year. Reed is also selling the titles alone, without any trade shows, which are the real money-spinners typically attached to such ventures. Emap fetched about 12 times last year's earnings before interest, taxes, depreciation and amortization when it sold its business-to-business arm to Apax and Guardian Media in December. Strip out the exhibitions and a fast-growing fashion-related Web site, and the sale price was probably closer to a multiple of between eight and nine. That is about what analysts are expecting for RBI, which would translate to a price tag of roughly £1.1 billion. As for the debt a buyer could use to finance a deal, it will probably come in at less than six times RBI's Ebitda-low by the standards of past private-equity transactions-and even that will be hard to arrange. Apax and Guardian Media are yet to syndicate their £850 million of Emap-related debt. It isn't expected to be an easy sell. Reed and the buyout firms may be trying to convince themselves there is a tiny oasis in the deserted dealmaking landscape. But it could well be nothing more than a mirage. --Richard Beales, Fiona Maharg Bravo and Jeffrey Goldfarb