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Post by jeffolie on Jul 25, 2007 11:07:03 GMT -6
Chrysler, Facing Resistance, Abandons Loan Sale Plan (Update1) Bloomberg
By Harris Rubinroit July 25 (Bloomberg) -- Chrysler abandoned plans to sell $12 billion of loans to complete its purchase by Cerberus Capital Management LP after investors balked at purchasing the high-yield, high-risk debt, according to investors
If private equity cannot fund their leveraged buyouts, then the stock market will stall.
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Post by jeffolie on Jul 25, 2007 11:22:47 GMT -6
Another leveraged buyout in trouble...
From Bloomberg: KKR's Banks Fail to Sell $10 Billion of Alliance Boots LBO Debt
Kohlberg Kravis Roberts & Co.'s banks, led by Deutsche Bank AG, failed to sell 5 billion pounds ($10 billion) of senior loans to fund the leveraged buyout of Alliance Boots Plc, two people with direct knowledge of the deal said.
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Post by jeffolie on Jul 25, 2007 11:34:00 GMT -6
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Post by jeffolie on Jul 25, 2007 12:53:10 GMT -6
Sinking Feeling for Citi, JPMorgan By Liz Rappaport Markets Columnist 7/25/2007 1:30 PM EDT The latest buyout debt debacle has left investors in Citi (C - Cramer's Take - Stockpickr - Rating) and JPMorgan (JPM - Cramer's Take - Stockpickr - Rating) with an unsettling feeling. The banks failed Wednesday to sell billions of dollars worth of loans to finance Cerberus' buyout of Chrysler Group and Kohlberg Kravis Roberts' buyout of Alliance Boots. The setback stands to load down Citi's and JPMorgan's balance sheets with more risky, unwanted debt securities -- a fact not lost on stock investors who sent the banks' shares down more than 1% Wednesday afternoon. The black eye comes as the banks and their Wall Street rivals have belatedly sought to rein in their exposure to risky debt. According to sources in the markets, banks have cut back funding to collateralized debt obligations that buy mortgage debt, and increased their collateral requirements for lending to hedge funds. But it grows clearer by the day that there is not much the investment banks can do to undo the hits they may have to take based on over $200 billion of commitments to finance the leveraged buyouts already announced. But, hedged or not, "banks are working with their working capital," says Stracke. "They can't be buy-and-hold investors." For the banks taking on the debt, they now have $20 billion of speculative-grade debt on their balance sheets. And for the leveraged loan market, which has already seen deals postponed and banks hanging on to extra paper, it means those securities will one day get dropped onto the market, most likely at a huge discount to the price at which the banks originally bought them. "There is a sense that there is a forced seller out there," says Stracke. So, if and when the banks sell all the loans they're collecting, the discount will surely drag down prices in the rest of the loan market, too. Chrysler and Boots aren't the first and they're unlikely to be the last loans to get stuck at the banks, either. Citigroup and JPMorgan made a point on their recent earnings conference calls to note that they expect their revenues will be somewhat stifled in the third quarter from being stuck with these loan commitments. The prevailing sentiment among bank loan investors is, Why would anyone buy a comparable new deal, when they know the banks will be having a virtual closeout sale on all their piled-up loans sometime down the road? The game of chicken just further stalls the market for leveraged buyouts, and particularly those for the riskiest companies. Citi and JPMorgan didn't comment. The underwriters of the $20 billion of Chrysler debt -- JPMorgan, Citi, Goldman Sachs (GS - Cramer's Take - Stockpickr - Rating), Bear Stearns (BSC - Cramer's Take - Stockpickr - Rating) and Morgan Stanley (MS - Cramer's Take - Stockpickr - Rating) -- could not sell the $12 billion portion of the deal tied directly to the Chrysler auto business, according to a report in The Wall Street Journal. The D word - derivatives "The panic has already happened" regarding the potential for these deals to fail, says Christian Stracke, senior strategist at CreditSights. He also notes that the banks have likely hedged much of their exposure to the loans in the derivatives markets. Indeed, the risk premiums on the U.S. automakers in the credit derivatives market have risen dramatically. Stracke says the same is true for the derivatives connected to Boots, and to the overall derivatives index tied to the leveraged loan market, which continues to fall and make new lows. www.thestreet.com/_yahoo/newsanalysis/wallstreet/10370143_4.html
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Post by unlawflcombatnt on Jul 25, 2007 13:42:50 GMT -6
It warms the cockles of my heart to see that the biggest investment banks taking big hits. It couldn't happen to a nicer, more "noble" bunch of guys.
I'd love to see the complete end of all leveraged buyouts. Though some may increase productive potential somewhere along the line, most just result in overvaluation of a company, resulting in windfall profits for banks and investors. And those profits aren't the result of product sales. They're the result of profits from the transfer of ownership from one entity to another.
It looks like we're on the verge of a Financial Sector-Investment Bank-Hedge Fund-led recession. (a real "leveraged" recession.) If we add this to the current Housing & Automotive sector Recessions, it'll put the entire U.S. economy in Recession, and maybe the entire world.
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Post by jeffolie on Jul 25, 2007 13:45:31 GMT -6
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Post by jeffolie on Jul 25, 2007 13:51:04 GMT -6
The Great Credit Contraction of 2007 or the Great Depression of 2008? Wednesday, July 25, 2007 | 07:31 AM What is the inter-relationship between Housing, LBOs & Stock Buybacks? Last month, I noted 6 reasons why rising yields were a threat to equity prices: Valuation The M&A/LBO Put Competition Profits Share buybacks Consumer spending As of late, we have seen the threat of two of these issues increase dramatically: The M&A/LBO Put and Share buybacks are being pressured by the increasingly expensive credit. "Bloomberg Radio reported this morning that the monthly issuance of Collateralized Debt Obligations (CDOs), or packages of debt instruments bundled together to form a "portfolio" of debt, dropped from $42 billion to $3 billion in the latest month. That 93% drop represents a significant tightening of liquidity that is starting to ripple throughout the credit markets. The fixed-income markets appear to be starting to understand that the days of free-flowing liquidity are likely to be behind us. Most credit spreads are widening." See Bill Gross latest for further discussion of the great credit contraction of 2007. Lastly, for those hoping this marks the bottom of the Housing derived credit bigpicture.typepad.com/
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Post by unlawflcombatnt on Jul 25, 2007 14:19:27 GMT -6
I think the following passage from the Financial Times article is the most telling: " Problems placing the debt for such large deals could signal that the peak has passed in the recent leveraged buy-out boom led by private equity companies flush with cash.
Such a sign would be likely to cause investors pain across both the debt markets and the stock markets, which many believe have benefited from higher valuations on the back of assumptions that a bid for almost any company could be just around the corner." Current investor-speculators do appear to assume there's always another price-enhancing LBO right around the corner. Once that assumption disappears, so will much of the overvaluation of the stock market.
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Post by unlawflcombatnt on Jul 25, 2007 14:43:48 GMT -6
So the investment banks are putting up their own money to finance the deals. Apparently they are unable able to raise the money from previously irrational investors by selling bonds/securities. And that means they'll have less capital available to finance future LBOs, which is just an excellent development.
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Post by blueneck on Jul 25, 2007 19:37:56 GMT -6
I guess i am not seeing why this Cerberus buyout of Chrysler is supposed to be so great.
Cerberus is run by none other than John Snowjob, most recently of Treasury secretary fame (or infamy), and previously of the Crash Spill and eXplode railroad (CSX), the one with the most dismal safety records of all the big railroads.
Cerberus is famous for cutting companies to the bone and casting off the rest at the same time taking in huge profits from the companies misfortunes.
These capital companies are the modern day equivalent of the trusts.
Chrysler would have been much better off selling to Canadian auto parts giant Magna - who at least had an interest in making cars.
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Post by judes on Jul 25, 2007 20:36:18 GMT -6
I guess i am not seeing why this Cerberus buyout of Chrysler is supposed to be so great. Cerberus is run by none other than John Snowjob, most recently of Treasury secretary fame (or infamy), and previously of the Crash Spill and eXplode railroad (CSX), the one with the most dismal safety records of all the big railroads. Cerberus is famous for cutting companies to the bone and casting off the rest at the same time taking in huge profits from the companies misfortunes. These capital companies are the modern day equivalent of the trusts. Chrysler would have been much better off selling to Canadian auto parts giant Magna - who at least had an interest in making cars. Exactly! And the first deal Cerberus makes as the new owners of Chrysler is to distribute the Chinese auto maker Chery's cars from a plant in Mexico that they will make them in, so they can skirt import tarriffs by sliding in under NAFTA rules. So it appears Chrysler is going to turn into a Chinese auto distributor instead of an American auto maker. Way to cut your own throat, chalk another one up for the vultures.
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