Time to get short???
Equity holders probably haven't noticed, but the financial markets are absolutely cracking. The bank debt market has backed up 53 bps in the past 2 days and is grinding to a halt. High yield and investment grade are following. Lenders are pushing for restrictive covenants and new deals are still trading down. Good, albeit highly levered, companies like Univision and Freescale have seen their bonds drop more than 10 points in a month. Bridges are getting hung and there is still $400 billion in high yield financing on the calendar. Investment banks will lose billions. And this is accelerating.
Still the equity market either hasn't noticed or doesn't care. M&A and LBO talk has driven the markets higher (save for today)... but it seems to me that everyone has forgotten to ask the obvious question: how would these acquisitions and LBO's be financed?
Still the equity market either hasn't noticed or doesn't care. M&A and LBO talk has driven the markets higher (save for today)... but it seems to me that everyone has forgotten to ask the obvious question: how would these acquisitions and LBO's be financed?
posted by Fresh at
10:04 AM
9 Comments:
Agreed, all these deals done by PE firms were done at higher prices as financing was essentially “in the bag” and guaranteed which no longer will be the case. The best case scenario is that as financial buyers walk away the strategic buyers will step in now that the prices are lower and you can still extract the same synergies as before. I’m not in that camp, plus going forward the banks will now (can’t believe this hasn’t been the case Jamie Dimon) include provisions that allow them to walk away and not be forced to fund the deal if the debt mkts balk.
The private equity guys are in the business of managing risk, which is why they push so hard for the bridge.
A year ago, this was viewed as a risk-free maneuver for the i-banks. You simply syndicated the bridge and those who committed were paid a small amount of money for offering to take the risk. They almost never got stuck with debt as any deal could get done in the bond universe.
Fast forward to about three months ago. The equity markets have continued their nice run, but PE still has money that they have to invest (you can't charge 2 and 20 for cash). So they are now paying higher multiples and they have to finance a higher multiple. Of course, they don't put additional equity in... they simply add debt. They ask the i-banks to bridge the deals, the i-banks say sure as this has been risk-free profit for them to date. They turn around to syndicate deals with higher leverage and higher risk and they can't find a buyer. A little concerning, but not scary for the i-banks yet.
Fast forward to today. High yield is a disaster. Things were bridged 100 bps or more tighter than where they would price today, if they would price at all. Investors are pushing back. The i-banks are stuck with this debt. They're not the type to hold risk, so they dump it... at 5 or 10 or 15% less than par. Potentially huge losses for the i-banks.
So what do the i-banks do? They stop bridging deals. As I said before, the PE companies are in the business of managing risk. They want to know a deal is financed before they consummate a buy. PE firms are left with three choices: 1) risk the financing (unlikely) 2) contribute more equity or 3) stop doing deals.
I have heard from a good source that a large consortium of PE companies recently approached Lehman (and presumably other i-banks) about providing financing for a $30 billion LBO. Lehman said absolutely not. From my understanding, the consortium has abandoned the deal. This is just getting started... we MIGHT be in the 3rd inning. Maybe.
Its so funny that you wrote this, i was just going to publish a thought piece on this board about how i think the markets are ready to crack. All of my consumer names are just getting thrashed lately on no fundamental news. I think that people realize the markets are overvalued and that incremental consumption will not be there in the near future & are country is likely on the verge of a recession. The only catch is that I do not believe for a second that we can lower rates given that foreigners own all our debt & finance our ponzi scheme. I mean looking at the Q1 flow of funds, US households sold $500 billion in stocks & $700 billion in bonds & foreigners represented 200% of total financial sales of bonds and stocks, which means they not only bought 100% of the new issues but also bought all of the securities that our households and institutions sold during the quarter...do you think these people are just going to sit and watch their investments get devalued if we lower rates - I mean the dollar is going down aggressively vs. everything right now at 5.25% - dollar is going down vs. stocks / bonds / energy / other currencies / food / and most recently vs. true money - gold.
My friends, my stagflation argument is looking good right now as I see double digit y/y growth in many commodity categories, incomes are going to grow faster this year - especially due to min. wage hikes, & the labor arbitrage with china is beginning to get squeezed a little as chinese workers are asking for a little more money and the yuan is starting to slowly appreciate. Finally, M3 is growing at an astounding 13% right now - meaning that it will only take 5yrs for our money supply to double & by definition everything else should jump up on a lagged basis as well.
WE ARE NOW LOOKING DOWN THE ABYSS OF THE WORST CASE SCENARIO THAT I SO VIOLENTlY PROJECTED IN THE CLIENT MEETING ONE YEAR AGO -
RISING PRICES & FLAT TO NEGATIVE GROWTH - i.e. the very worst thing that can happen to an economy.
For your sake, I hope your picks are doing well. If the scenario you described plays out a lot of people in our profession will be out of a job, many never to return. Best way to avoid that is to have good picks. Otherwise, start building the underground bunker...
I am long the theater industry - an industry that has historically exhibited above trend pricing power during recessions and whose business is not tied to the general economy as it is instead tied to hollywood movie product. In addition, these stocks carry large dividend yields that make them very similar to low duration bonds in that the risk is much lower than a typical high multiple non cash distributing co. (div. or buybacks). The result of this is low beta names that will definitely outperform in a market downturn. For example, today the S&P 500 was down 120bps and my favorite name Regal Entertainment (RGC) that we own 8% of the company only went down 30bps and for the last three days when the market went down 150bps rgc is actually up 230bps meaning that it has outperformed by a little over 400bps. As a comparison, another name that I have a 1 rating on (1 out of 5 for reference) that is a retailer went down 350bps. While my shop is almost completely bottom up and not concerned with macro conditions, I am a little nervous about this call.
However, overall, I totally agree with your point that there will be a consolidation in the number of analysts & outflows will likely exceed inflows, which will be bad for the industry and my fidelity stock that I own as we will definitely not make as much money in a down market. Nonetheless, I do not think that being realistic and making conclusions based off my research and analysis should not be clouded by overly optimistic views simply based on what would be ideal for me and all my buddies like you in the industry. Anyways, being bearish is always met with strong opposition so I think that being bearish actually makes you think harder through your thesis b/c it is challenged much more often than if I was to have a bullish view.
On another note, I just booked a hotel room at the four seasons for a week in SF from Sept. 12 to Sept. 19 when I will be visiting a couple of my companies & attending the BOA fall conference on Mon - Wed the next week. Email me your contact info so that we can catch up, maybe with paul as well, and grab a beer. Hope all is well.. El Cid.
I like the theater industry also, but I think it is a fallacy to say that the theater industry's revenue is not tied to the economy. While it may not be as dependent on the economy as numerous other businesses, it is still true that movie tickets come directly out of discretionary income.
I can see a scenario where we have a disastrous economy and theater admissions rise (after all, a movie ticket at $9 is a bargain compared to almost every other form of entertainment), but overall profitability either drops or stays flat due to a fall in concessions (which average 90% EBITDA margins... popcorn and soda!!!). After all, if you are watching your dollars, do you really want to spend $8 on a soda and popcorn?
At any rate, I expect that movie theaters as a business will out perform A LOT of other categories over the next few years.
Also, a certain person who shall go unnamed tells me that the bank debt market is cracking... there are no bids. This can only trickle down as they are the most senior claim holders in the capital structure.
What is the deal with the vegas trip?
1/2 the group never replied. Huck said he was in, then out. El Cid said he thought he'd be in Wisconsin. Wokasch can't go. Pecker and Dov said they might depending on who went. You said you were in.
I'm wavering now as it is looking as though I may be acquiring a new vehicle.
Feel free to look into it further if you like. Tickets are available from UNLV, but you have to call them.
Post a Comment
Subscribe to Post Comments [Atom]
<< Home