Evening Links 3-14

Mar 15, 2010 00:48 UTC

Private equity’s Trojan Horse of debt (Morgenson, NYT) Great piece from Gretchen. Another example of private equity — in this case TPG and Apax Partners — taking cash out of a corporate balance sheet by loading it with debt. See also the case of Thomas H. Lee Partners and Simmons.

Must ReadIn hard times, lured into trade school and debt (Goodman, NYT) This is an issue close to my heart and, actually, it’s the same story as above. The only difference is that instead of finding corporate balance sheets to use as an ATM, for-profit education looks for vulnerable people trying to improve their lot in life. Find a warm body eligible for taxpayer-guaranteed federal loans and it matters little the quality of education you provide….you’ve already taken the cash out, cash the government provides. This article is loaded with colorful details, but Goodman saves the best for last. The government requires that only 10% of tuition money come from students themselves or private sources. On this portion, the companies set aside “roughly half” (!) to cover bad debt. But “they’re making so much money off their federal student loans and grants that they can afford to write off their own loans…”

Promises, promises (David Merkel) When all others fail, the last balance sheets that can be used to take cash out are governments’.

Lehman examiner punted on valuation (Partnoy, NC) Lehman examiner Anton Valukas is getting lots of credit for his very thorough report. Even so, at nearly 2300 pages, the report only glosses the surface in some respects. Lehman’s operations were so complex they’re impossible to properly catalog. No doubt the same is true of all the large investment banks: C, GS, MS, JPM, even BAC. We think 1) that these behemoths can be properly regulated? And 2) that when they get into trouble new “resolution authority” will enable them to be shuttered without causing financial contagion?

Science fails to face the shortcomings of statistics (Siegfried, Science News) “…if you believe what you read in the scientific literature, you shouldn’t believe what you read in the scientific literature.”

We bought a toxic asset, you can watch it die (NPR, ht Reje)

Say goodbye to unlimited wireless data plans (Gizmodo)

Black Cobra (Swedish) gang steals selection of small cakes (thelocal.se)

I’m with CoCo artist: My life has totally changed (TMZ)

I want one of these in my office…

panda

COMMENT

Maybe a month ago BusinessWeek had a full length feature on the problems with gov’t reimbursements in tuiton re: gov’t employees/military service people.

It was a good read.

Posted by Beezlebufo | Report as abusive

Lunchtime Links 2-1

Feb 1, 2010 19:15 UTC

President’s budget (gpoaccess.gov)

Barney Frank: The poor should rent, not own (Indiviglio, Atlantic)

Citigroup said to plan sale of private equity unit (Keoun/Keehner, Bloomberg) Citi cites raising cash to pay down debt as the reason to sell this unit. Of course this would also get Pandit some brownie points with Paul Volcker, who wants commercial banks out of private equity, hedge funds and proprietary trading…

HCA owners get $1.75 billion payout (Lattam, WSJ) Speaking of private equity…a nice payout for investors in one of the biggest LBOs in history.

All those little Stuy towns (Morgenson, NYT) Bullying as a business model…

Goldman Sachs and the $100 million question (Times UK) This is a thinly sourced article that claims Lloyd Blankfein will get a blowout $100m bonus for 2009. If true, talk about giving the finger to, well, pretty much everyone.

Five myths about America’s credit card debt (Manning, WaPo)

Happy palindrome day! (imgur)

Barefoot running: How humans ran comfortably, and safely, before the invention of shoes (Science Daily)

Accidental time capsule…

COMMENT

Regarding running, yeah, you should land (and stay) on your forefeet, not on your heel. However, you’re resting when you land on your heel (it’s like walking), so it’s more energy efficient to heel strike. This ain’t exactly new news…

At any rate, we should all forefoot striking. When I used to heel strike, I broke small bones in my feet several times, and was constantly dealing with shin splints, sore knees, sore hips. I will note, however, that the first time I went from heel strike to forefoot strike, I went from running 12 miles a pop to 1.5 miles a pop before my calves and my feet tired out and I couldn’t run anymore (forefoot striking, that is… I could still heel strike). It took me a long time to build back up, and I run about 1 mph slower forefoot striking because of the energy difference (went from 8.6 mph to 7.5 mph, body temperature limited, not cardio limited). It’s a no brainer as long as you’re not racing competitively.

You need flat running shoes to forefoot strike. Most running shoes have high heels because heel strikers need the extra cushioning, which in turn makes it harder to run on your forefeet unless you set a treadmill to incline. Something like a New Balance 758 is reasonably flat.

If one can’t forefoot strike, then I’d seriously suggest not running and hitting an elliptical machine instead.

Posted by Mikey | Report as abusive

Back to (buyout) biz as usual

Dec 1, 2009 16:50 UTC

Reason #147 that nothing has changed: leveraged buyout private equity shops Carlyle and Hellman & Friedman are tapping the loan market to pay themselves dividends. From Pierre Paulden and Kristen Haunss at Bloomberg

Carlyle Group, the world’s second-largest private-equity firm, and Hellman & Friedman LLC are seeking to take advantage of a record rally in high-yield, high-risk loans to take cash out of companies they bought last year amid the financial crisis.

Goodman Global Inc., a maker of air conditioner systems bought by Hellman & Friedman, has asked lenders to allow a payment of as much as $115 million to the private-equity firm. Booz Allen Hamilton Inc., the U.S. government-consulting company purchased by Washington-based Carlyle, is seeking a $350 million term loan to finance part of a $550 million payout to its owners, Marie Lerch, a Booz Allen spokeswoman, said last week.

PE can be a great gig. Get control of a company, take cash out, leave bondholders to clean up the mess when the company falls into bankruptcy. A recent example is Thomas H. Lee Partners buyout of Simmons:

For many of the [Simmons'] investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.

But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.

How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times and an example of a growing phenomenon in corporate America.

Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.

But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.”

Greed is good!

COMMENT

The pundits claim that wall street activity (bubble building etc.)enhances productivity and provides seed capital to entrepreneurship and vital funding to industry and propels growth so why the net effect is minus a negative in terms of long term employment homeownership and positive household balance sheets.Why this accumulation of debt has become all pervasive and how can use of debt enhance overall growth.

Posted by cosmicinsight | Report as abusive

FDIC lowers capital rule, but there’s a twist

Aug 26, 2009 22:03 UTC

FDIC concluded its quarterly board meeting earlier this afternoon and the big news is it approved lower capital requirements for private equity shops looking to buy failed banks.*

But the weaker requirements come with a silver lining.

The previous proposal was that banks in the hands of private equity would have to maintain Tier 1 capital of 15%, triple the standard of 5% that is currently considered “well-capitalized.”  [Your humble columnist thinks that threshold is way too low, but that's another discussion].

Under the rule that was adopted, such banks will have to maintain a 10% capital ratio, but the definition of capital isn’t Tier 1, it’s Tier 1 common equity.

Tier 1 common equity is close to tangible common equity, which is a stronger measure of capital than simple Tier 1.

Why does this matter? As I wrote about in my column updating Q2 leverage stats, it’s not just the size of the capital cushion that matters. It’s also the quality of that cushion. (If this post seems a little wonky, I recommend going back to that column.)

Common equity is the best cushion of all because it sits in the first loss position. Preferred equity — which is included when calculating Tier 1 but excluded when calculating Tier 1 common — failed totally last year. Banks had issued a bunch in late ’07 and early ’08 in order to boost Tier 1, but because common was nearly overwhelmed with losses, investors higher up the capital structure panicked.

To be sure, the switch to common won’t have any effect on the day-one economics of these deals. Subordinated debt is wiped out when FDIC takes failed banks into receivership.

But this will discourage private equity guys from polluting the capital structure down the line. Hybrid debt issuance that would qualify as capital under Tier 1 won’t qualify under Tier 1 common.

My hope is that this foreshadows a more general move away from Tier 1 in favor of Tier 1 Common or TCE for all banks. The banking system is still desperately undercapitalized in my view, taking into account the loan losses that are festering on balance sheets.

On another front, I was disappointed to see that FDIC abandoned the “source of strength” requirement, which would have required PE shops to put up more capital if their banks falter.

But they maintained the three year holding requirement, and they say that banks falling under the 10% TCE threshold would be subject to prompt corrective action (ht frog). That means FDIC could force them to boost capital back above the 10% threshold.

———–

A question for readers: Are there any protections in place preventing PE shops from using insured deposits to fund investments in other areas? What’s to stop them from using the bank to finance their own LBO deals?

*Readers interested in the nitty gritty can read the FDIC’s Final Statement of Policy here (pdf).

COMMENT

Rolfe -on the question your raised, see Federal Reserve Regulation O – http://ecfr.gpoaccess.gov/cgi/t/text/tex t-idx?c=ecfr&sid=635f26c4af3e2fe4327fd25 ef4cb5638&tpl=/ecfrbrowse/Title12/12cfr2 15_main_02.tpl

It is pretty much prohibited.

Posted by Terry | Report as abusive
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