Editor’s Note: Today’s guest column comes from Randy Schwimmer of mid-market lender Churchill Financial.
“Risky-Loan Market Back in Gear,” declared the WSJ headline on last Friday’s Money & Investing section. Don’t get us wrong; we love the Journal. And we love the attention being paid to the leveraged loan space. And we totally get the whole journalistic short-hand thing. Editors always seem to default to their pet adjectives: Junk bonds. Toxic mortgages. Risky loans. Hapless Mets.
Then Saturday, while perusing the usually sensible Barron’s, we noticed the lead editorial referring to the Journal piece, calling leveraged debt “the stuff that played such a key role in the demolition of the credit market and the economy during the Great Recession.”
OK, deep breath. Setting aside the blanket blame on all leveraged debt when the real villains of the Credit Crisis were sub-prime mortgages, what we really object to is the casual equating of “risky” with “loans.” Certainly things are hotting up in the buyout arena of late. New LBOs have increased as a percent of total new issuance. Leverage, while not back to the “frothy” (another favorite modifier) days of 2007, has rebounded smartly from the lows of early 2009. And dividends to sponsors – always a sign of exuberance in the credit markets – are at their highest levels in over three years.
But before judging how risky loans are, consider default rates. Despite all the market agita during the height of the debt crisis that loan defaults would skyrocket to almost 20%, they didn’t. In fact defaults peaked in the 8% neighborhood, and then quietly dropped off to their current levels around 5%. Actual loan losses were a fraction of that.
How about loan prices? Secondary trading levels dropped off a cliff after Lehman filed, and the LCDX index bottomed out at 65 cents in mid-December 2008. But that discount turned out to be almost completely liquidity-driven, not based on credit fundamentals. Smart investors who bought loans then ended up making close to 50% on their money.
Which may also explain in part why loan buyers are voting big-time today with their cash. Fund flows into loan funds last week, according to Lipper FMI, set a one-week record of $480 million. That brings the total cash into those funds of over $6 billion this year.
Where’s all the dough coming from? Equity mutual funds and money market accounts, whose holders have been so spooked by the volatility and lack of yield of those respective assets that they’re exiting in droves. The consistent returns and, yes, relative low risk profile of loans, have been impossible to resist.
Risky loans? How about risky stocks? If you had bought the Dow at the peak of the market three years ago, you would now be down 25%. But we digress.
Retail investors are not alone in seeing the virtues of the loan class. Both private equity sponsors and institutional buyers like pension funds have been stepping into loans with big commitments over the past few months, especially for middle market businesses.
How can PE make loan returns work? We’ll tackle that question next week.
Now about those Mets…
Randy Schwimmer is senior managing director and head of capital markets at Churchill Financial, as well as columnist for its weekly “On the Left” newsletter. For now you can read his columns first here on Monday. Reach him at rschwimmer@churchillnet.com.
Top Three
Indian conglomerate Sahara India Pariwar is in a preliminary talks over possibly buying the debt of Metro-Goldwyn-Mayer for $1.5 billion to $2 billion, according to two people familiar with the matter. MGM, which has about $4 billion in debt, is owned by a group that includes Providence Equity Partners, TPG, Quadrangle Group, DLJ Merchant Banking Partners, Sony Corp and Comcast Corp. MGM has until Oct. 29 to seek remedies for its debt problem.
KKR & Co., TPG Capital, Carlyle Group and Bain Capital LLC are competing to acquire a part of Honda Motor Co.’s stake in India’s biggest motorcycle maker, Bloomberg reported. Two of the funds may jointly acquire about 15 percent, valued at $1.1 billion in Hero Honda, the news agency said, citing three anonymous sources. Another 5 percent may be sold to the Munjal family, founders of the Hero group, the report said, citing two unidentified people. Honda Motor and the Hero Group each own 26 percent of Hero Honda.
Pandora Jewelry LLC launched of IPO worth up to $2.16 billion. The Danish jewelry maker set a preliminary price range of 175 to 225 crowns per share. This would value the company’s equity at up to 29.2 billion crowns ($5.13 billion). The IPO would be worth $1.45 billion at the low-end price without the overallotment shares and up to $2.16 billion at the top price with the greenshoe. Pandora’s shares are expected to start trading on the Copenhagen bourse on Oct. 5. PE shop Axcel of Denmark owns 59.3 percent of Pandora.
VC Deals
Cirtas Systems closed a Series A funding round totaling $10 million. NEA, Lightspeed Venture Partners and Amazon participated in the round. San Jose, Calif.-based Cirtas Systems also unveiled its Bluejet Cloud Storage Controller solution for medium to large enterprises and announced the product’s general availability. Cirtas Systems plans to use the capital for infrastructure investments that support the accelerated developm! ent and adoption of its Bluejet technology.
BA-Insight Inc., an enterprise search software company specializing in Microsoft-based information access technology, secured $6 million in private equity funding. The financing was led by Milestone Venture Partners. Paladin Capital Group and Osage Venture Partners also invested in the round. The New York State Common Retirement Fund participated in the financing through funds managed by Milestone Venture Partners and Paladin Capital Group.
Buyout Deals
Clorox Co. is near a deal to sell its STP and Armor All auto-care brands to Avista Capital Partners, according to Bloomberg News. The deal is valued at $750 million to $800 million, the story said. Blackstone Group LP, Golden Gate Capital and Castle Harlan Inc. were among the firms that looked at the assets, which have been on the block s! ince April. J.P. Morgan Chase & Co. is advising on the process.
RAE Systems Inc., a developer of sensor solutions for the industrial, energy, environmental and government safety markets, signed a definitive agreement to be acquired for $1.60 per share by an affiliate of Battery Ventures. The purchase price represents a premium of approximately 53.8% over RAE Systems’s closing share price on Sept. 17, 2010. The transaction requires RAE Systems shareholder approval.
An investor group led by Gores Group LLC of Los Angeles acquired the Cosmopolis high purity cellulose mill from Weyerhaeuser Co. Financial terms of the transaction were not disclosed. The group includes Dermot Smurfit, a paper and packaging industry veteran.
Kohlberg Kravis Roberts and TPG are in early talks about making a joint bid for the wine unit of Australian brewer Foster’s, the Australian Financial Review said on Monday. The firms have not decided is they will make an offer either together or separately, the newspaper said in its online Dealbook.
Silver Lake agreed on to buy a minority stake in Brazilian Web hosting company Locaweb for an undisclosed sum, to tap explosive growth in the world’s fifth-largest Internet market. Silver Lake’s Silver Lake Sumeru made the purchase of the undisclosed stake in Sao Paulo-based company.
PE-backed M&A
An affiliate of Hellman & Friedman Capital Partners VI LP agreed to acquire Internet Brands Inc. in a transaction valued at about $640 million. Internet Brands’ shareholders will receive $13.35 in cash per share. This bid represents a premium of about 46.5 percent compared with the Internet media company’s closing price on Sept. 17, 2010.
PE IPOs
United Test & Assembly Center is seeking to relist in Singapore through an initial public offering, sources said. The IPO will be worth between $400 million and $600 million, a source with direct knowledge of the deal told Reuters. The microchip tester was taken over by TPG and Affinity Equity Partners in 2007. The IPO is slated to occur during the first quarter.
PE-backed Exits
General Atlantic has put AKQA, a digital ad agency, on the block, according to Ad Age. Morgan Stanley is advising on the deal, the report said. Potential buyers could include publishers to ad holding companies. According to the report, which cited UK blogger Stuart Smith, Dentsu ! has made a $600 million bid for AKQA. Separately, The Wall Street Journal, in a story dated Sept. 20, said that Rosetta LLC, another large digital ad firm, is in talks to buy Level Studios, a 15-year-old interactive marketing firm. Lindsay Goldberg invested in Rosetta in 2007.
Motorola Inc. has bought Aloqa GmbH, a Pal Alto, Calif.-based company that develops location-based software and technologies for smartphone users. Financial terms were not disclosed. The transaction marks Wellington Partners’ exit from Aloqa.
Portfolio Companies
Angelo, Gordon & Co. and Oaktree Capital Management LP jointly proposed an alternative reorganization plan for Tribune Co. The two firms are major creditors of the publisher of the Chicago Tribune and the Los Angeles Times. Under the proposal, structurally subordinated Tribune creditors will receive an interest in a litigation trust, which will pursue claims found viable by a bankruptcy investigator.
Tom Hicks, Liverpool FC’s co-owner, has inked a financing deal with a PE firm to retain ownership of the club, according to the Associated Press. Hicks and co-owner George Gillett Jr. put Liverpool up for sale in April, saying they lacked the funding to take the club forward due to its debt of 237 million pounds ($370 million), the story said. Blackstone Group’s GSO Capital Partners has offered Hicks a two-year funding package worth around £280 million ($437 million) ahead of the October deadline to repay the debt to Royal Bank of Scotland. Blackstone, in return for its investment, ! would share control of the club.
Egan-Jones Proxy Services recommended Barnes & Noble Inc.’s shareholders support the bookseller in its proxy battle with billionaire investor Ron Burkle. The advisory firm said shareholders should support two of the bookseller’s three director nominees including Leonard Riggio. It also urged shareholders to reject Burkle’s proposal to change Barnes & Noble’s poison pill.
Standard & Poor’s cut its corporate credit rating on Graceway Pharmaceuticals LLC to ‘SD’ from ‘B-‘. The ratings agency also lowered its issue-level rating on the Bristol, Tenn.-based company’s senior secured bank credit facility to ‘CC’ from ‘B-‘. The lowered ratings come after Graceway Pharmaceuticals’s failure to make an interest payment on its $330 million second-lien loan on Aug. 31. The missed payment triggered a cross-default. Graceway Pharmaceuticals is a portfolio company of GTCR Golder Rauner.
Human Resources
SVTC Technologies LLC, a San Jose, Calif.-based commercialization service provider, named Ajit Manocha to its board. Mr. Manocha was Spansion Inc.’s executive vice president of worldwide operations and a member of the executive management board. SVTC’s investors include Oak Hill Capital Partners and Tallwood Venture Capital.
News items written and compiled by Research Editor Eamon Beltran
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