Banks and buyout firms faced with finding investors for the surfeit of LBO debt they have amassed might have come up with a partial solution. They plan to use their own debt and equity to fund vehicles that will invest in the overhang of debt – with the obvious potential that institutions will effectively end up buying deals that they themselves underwrote and/or brokered.
It should not come as much of a surprise that the lines between sponsors, arrangers, underwriters and investors have become blurred. The finance industry that had cropped up around the LBO frenzy had been doing just that for the past year or so. A handful of buyouts used the same banks to fill the role as auction adviser, lead debt arranger and equity investor, for example.
In rare instances this had caused problems, such as on
Banks and buyout firms are looking into a variety of different ways to invest. In some cases banks are understood to be providing the debt and equity behind funds; in others, cash-rich buyout funds are asking brokerages for leverage.
Lehman Brothers expects to put the finishing touches to its fund this week, while
“There’s no joint venture,” a source familiar with the talks said. “There were discussions about financing a significant amount of collateral in conjunction with
The drive is obvious. Hamilton James, Blackstone’s president, put it concisely in August. “For companies that we worked on and were overbid, we’re starting to look at those as being very attractive investments,” he said. “I think we might be able to buy the debt in these companies and get a higher return than the underlying equity.”
Not every banker is convinced that the financial equivalent of ever-decreasing circles makes sense. Commercial banks’ credit committees have not been keen to extend more credit to buy debt, even when the underlying assets are undervalued.
“You have the situation where a money manager is coming around to us with US$1bn in equity and asking to leverage them three or four times and we’re saying ‘no’,” one banker said, adding that such funds, by increasing leverage, could exacerbate the problems they seek to capitalise on.
Bankers were keen to stress that banks were not seeking to raise funds – potentially off-balance sheet funds – to hide debt that was obviously hurting their bottom line. “Yes, we could conceivably invest in our own deals, but in no way is it an attempt to hide any of it,” said another banker.
Other, more traditional investors are also seeing the opportunity to buy debt cheaply. BlackRock, for instance, is in the process of raising a fund for as much as US$5bn specifically to invest in buyout loans.
Even with reluctance among banks to extend credit, the newly created funds are enabling arrangers to syndicate out the risk they hadn’t been able to get rid of weeks ago.
“We’ve been out there selling our wares,” one loan banker said, noting that new investors, such as other banks and sponsors, were getting the loan market up and running. “We saw a window in the market on the heels of [the successful selldown of some LBO debt involving] First Data,” the banker said. “The market’s been stimulated by a variety of things that have improved: the Fed rate cut, brokers’ earnings and, frankly, deals blowing up – like Harman and possibly Sallie Mae – and taking some of the supply out of the market.”
That stimulus has enabled many non-traditional buyers to emerge to replace the CLOs that previously dominated the market.
“Our investors groups are kind of strange. We have equity-income funds, banks, hedge funds and funds affiliated with buyout shops comprising the syndicate,” the loan banker said. He added that the attraction for these funds was the discount deals were getting relative to original terms but also relative to other investments, such as bonds.