Blackstone Hoping to Renegotiate Hilton Debt

I give Blackstone bonus points for attempting to fix its pesky $20 billion Hilton debt problem before the crud actually hits the fan. Apparently, the private equity group is hoping to convince holders of the debt to make some minor adjustments, like swapping their crappy debt for crappier equity, or extending maturities out even further, maybe until 2050 when the commercial real estate market starts booming again. Blackstone is even offering to contribute $800 million in additional equity to buy back debt at a discount. So many fancy accounting and financing tricks, so little time. The problem is it is hard to escape a turkey of a deal like the Hilton LBO, that was struck during the fairy tale days of the credit bubble. Unfortunately, it is hard for us to escape the Hilton LBO as well, for the Fed owns $4 billion in Hilton bonds, courtesy of Bear Stearns, via that awesome $29 billion risk-free loan the Fed gave to JP Morgan so it could purchase the more solvent portions of Bear. The only good news is that the terms of the debt limit Blackstone's ability to repurchase Hilton debt.

Blackstone is hoping to cut the debt load by $5 billion, as I'm sure that will make its equity portion worth more. After already writing off the investment by two-thirds, Blackstone needs all the help it can get to make its investors whole. I wish them luck with their negotiations. Personally, as a senior debt holder, I'd tell them to take a hike. Maybe cough up another $5 billion in equity? Then we can talk.

Mr. Bernanke is probably just getting a phone call right now from Steve Schwarzman asking him to take a haircut on the Fed's Hilton debt. Mr. Bernanke wonders out loud "How'd we wind up owning Hilton bonds?" An assistant whispers something in his ear. He sighs, then picks up the phone to call Blackrock, to find out what to do...

Pension Plans and Private Equity

Bloomberg reports on pension plans' enormous contribution to the recent boom in private equity. Three of the biggest investors in private equity are the state pensions of California, Oregon and Washington, which shelled out $53.8 billion in the past decade to private equity funds. In return they have recouped just $22.1 billion in cash by the end of 2008. One can easily assume that they've collected nada in 2009 as private equity-backed firms have done nothing other than go bust since the start of the year. In fact, the three pension funds haven't reaped a paper gain from funds formed in the past seven years.

According to the Bloomberg article, investments made in 2006 and 2007 are currently valued at $15.8 billion on the pension funds' books as of the beginning of the year. Whether those valuations, which are theoretically marked to market due to FAS 157, will bear out is anyone's guess, but I'll go ahead and try. My sense is that the equity in private equity deals struck in 2006 and 2007 is virtually worthless. The deals were all highly leveraged and done at ridiculous prices. Maybe not all of the companies will go bankrupt, but certainly very few of them will have any equity value left for investors. This might be why college endowments such as Harvard were punting their private equity holdings at 50% of their value. It's a very easy scenario to envision these investments going straight to zero, and Harvard has bills to pay.

Now that everyone expects a large V-shaped recovery, supporters of illiquid private equity investments for pensions and endowments are coming out of the woodwork claiming that a turn-around in valuations is now beginning. An Oregon spokesman is quoted as saying "The market is in a trough. The picture would've looked different at the end of 2007." Sure, it would have. Because back in 2007 everyone was marking all of their holdings way too high based on silly expectations for growth that turned out to be dead wrong. 2007 valuations weren't real. They were a mirage. And maybe we're in a trough, but it's also highly likely that valuations will go much lower. These are illiquid, highly leveraged investments.

Instead of pulling back from private equity deals as the bubble grew, pensions actually continued to raise their allocations. The three state funds more than doubled their buyout commitments in 2005 to $8 billion from $3.1 billion. Then they committed $18.7 billion the following year. Essentially, they invested most of their allocation towards the asset class at the very peak. A foolish choice that will certainly cost their retirees greatly.

GMAC Claims $6 Billion of the Bailout Pie

The government committed $6 billion in bailout funds to GMAC, the finance arm partly owned by General Motors and Cerberus Capital.  The Treasury purchased $5 billion in senior preferred equity in GMAC that pays an 8% dividend and offered a new $1 billion loan to GM so the auto maker could participate in a rights offering at GMAC.  The new loan to GM was in addition to the $17.4 billion in emergency loans recently announced.  GMAC will issue warrants to the Treasury in an amount equal to 5% of the preferred stock purchase that will pay a 9% dividend if exercised.

Last week, the Federal Reserve approved GMAC as a bank-holding company.  The approval was conditional on GMAC raising new capital, which the company attempted to accomplish through a fancy crappy-debt-for-crappier-equity swap that expired Friday.  GMAC was supposed to raise $30 billion by converting 75% of its issued debt into preferred-stock holdings.  Last week, less than 60% of bondholders had signed on and the offering had been extended four times.  Completely coincidentally, and slightly suspiciously, GMAC announced that it had raised enough capital to satisfy the debt conditions simultaneously with the Treasury's announcement that GMAC had been approved as a bank holding company.  According to the Wall Street Journal's account of the story, it wasn't clear whether the government's intervention prompted or followed GMAC's meeting the capital requirement.  My interpretation of the WSJ's statement is that John Snow, the most politically connected head on the three-headed monster that is Cerberus, is proving that what he lacks in investment savvy, he more than makes up for in Washington connections.  As the former Treasury Secretary to George Bush, Mr. Snow was able to convince the Bush administration in its waning days to help a fellow suffering white, absurdly rich, private equity brother out.  And although Mr. Snow was widely viewed as a terrible Treasury Secretary while at his post, sending Mr. Snow to lobby the government for bailout money was a far more palatable option than dispatching Dan Quayle, the other political clown advisor that Cerberus keeps in its arsenal for government lobbying opportunities when it needs a bailout for its incredibly poor investment decision-making.   

It is easy to argue that a bailout for GMAC is necessary if the government is interested in saving General Motors.  After all, GMAC finances about 80% of the wholesale purchases of GM's cars by dealers worldwide and has traditionally been the largest source of financing for the buyers of the vehicles.  Without access to auto-financing, most people aren't interested or capable of plunking down $20,000-$40,000 for a new car.  But I would've preferred it if Cerberus was forced to cough up a significant amount of new capital alongside the government, or had its equity investment wiped out, much like the shareholders of Fannie Mae, Freddie Mac, and AIG suffered when the government came to their rescues.  On second thought, given how carelessly the government funds have been doled out by the current administration, I'm not sure why I expected anything different. 

Can it Get Any Worse For Cerberus?

While lawmakers were busy attempting to hammer out a bailout plan for the automakers, somebody looked up, scratched his head, and said "Wait a minute, isn't Chrysler owned by a private equity firm?  Don't we hate those guys for contributing to the credit crisis by piling on debt to cyclical companies, laying off employees under the guise of "efficiency" and then driving them to bankruptcy because they didn't really know what they were doing and it was just a bubble?  Don't we also hate them for paying themselves all kinds of money and getting favorable tax treatment?  Wait a minute!  Didn't they hire John Snow, a guy who was so bad as the Treasury Secretary that he was forced out by the worst President in the history of the US?  More importantly, isn't Dan Quayle on their payroll????!"  Bailing out the public automakers, GM and Ford, that have been shut out of the capital markets is one thing.  But why should the government bailout Chrysler, privately owned by the three-headed dogs at Cerberus?  Don't the dogs have loads of capital that they can inject?  Details of the bailout plan will be forthcoming, but I hope Cerberus is at least required to pony up some cash alongside the government.

In other Cerberus Sucks news, GMAC's application to become a bank holding company was denied due to insufficient capital.  GMAC is attempting to complete an old-crappy-debt-for-new-crappy-debt swap to restructure. Again.  After the last restructuring didn't work.  So far, only 25% of investors are going for it.  Without the debt swap, the company's prospects are not looking so hot.  Apparently, there are only so many financial engineering tricks investors are willing to fall for before they throw in the towel and decide to take their chances in bankruptcy court.  Did Cerberus really think that guarding the gates of hell would be easy? 

Exotic Illiquid Investments Losing Luster With Pensions, Endowments

According to the Wall Street Journal, The Pennsylvania state employees' pension fund may be forced to make cash payments of $2.5 billion or more to Wall Street trading partners, due to investments in a "complicated" strategy referred to as "portable alpha."  Portable alpha is basically a leveraged bet on hedge fund performance.  An investor buys derivatives to match the market's return (the beta) and then uses the excess cash to invest in hedge funds (the alpha.)  According to the Wall Street Journal, an estimated $75 billion or more has been invested using portable alpha, with pension funds being eager players.  This strategy worked brilliantly from 2003-2006, as did pretty much any investment in anything during the bull market.  Leverage in a bull market is fantabulous.  Those who weren't around during the Long Term Capital kerfuffle in 1998 just recently learned: leverage in a bear market is deadly.  What has contributed to the deadliness of this credit market blow-out is the use of leverage to enhance returns on illiquid investments.  It's one thing to borrow a bunch of money to buy stocks or plain vanilla bonds.  The market goes down, you are forced to sell your stocks and bonds to repay your debt and it's over.  You're out of business but it's a pretty quick hit to the market.  However, stocks and bonds are fairly liquid.  What happens when you are leveraged and invested in illiquid assets, such as private equity funds, hedge funds, land, and oh, I don't know, timber?  Now you have a big problem.  Maybe you thought your hedge fund was liquid, but, um, no, now that it has frozen all redemptions due to the fact that it is down 65% for the year, and it was invested in all kinds of crap you never understood; not so liquid.  Your private equity fund?  Oh yeah, those guys have been in the business for years, everyone is clamoring to get into that fund because it's so prestigious.  I'm sure I can just sell my stake in the fund to someone else who really really believes in the Chrysler, GMAC, Freescale [insert name of highly cyclical company taken private at the peak of the economic cycle and loaded up with debt] turnaround story.  Except that, um, maybe not.  Because, you see, Harvard and a host of other investors who used to have a long investment horizon are now rushing to sell those stakes too at discounts of over 50%.  Also in line to punt private equity stakes are AIG (must repay government loan) and Lehman (must finish liquidating to complete bankruptcy process.)  The problem is; too many people rushing for the exits, and far too few lined up to buy either because they can't or because they believe that even a 70% discount is a crappy deal.

Investors have learned a very hard lesson in the past year.  The common refrain pitched by Wall Street to investors with supposedly long time horizons was that the extra yield offered by less liquid investments was worth the risk of tying up your money in assets that weren't easily redeemable.  Unfortunately, investors didn't demand enough of a premium for liquidity risk.  Now that they need the money, they are paying the price by having to sell their stakes at huge discounts.  What this has created is a yawning divide in the price between liquid and illiquid assets that, frankly, should've always existed.  Sure stocks are down around 40% on the year.  But many hedge funds are down more, and if they've frozen redemptions, good luck ever getting your money back.  Hedge funds have turned out not to be liquid investments.  Private equity funds don't have to mark to market, but given the lack of an exit strategy for most of their investments, they are facing a much longer time horizon than expected to reap any returns.  The time horizons, of course, will be shortened when a host of firms that were recent leveraged buy-outs go bankrupt because they were terrible investments. 

Given the horrible returns that pensions and endowments are certain to post this year, there will be a huge backlash towards the alternative investing that has been the rage for the past several years.  Risk premiums will return to more realistic levels without everyone chasing after the same investment strategies.  Ultimately, extraordinary investment opportunities will abound for those willing to take the risk.  Investors who have patiently sat on the sidelines for years because they didn't believe all the hype, will be in a position to cherry pick from a variety of investment options offering significant returns.  Fees for hedge funds and private equity funds will be reassessed and reduced significantly.  The alternative investment party is finally over.      

Woe is Private Equity

Blackstone Group, the world's largest public private-equity firm, posted a sizable quarterly loss today, shocking even the most pessimistic analysts' estimates.  The company posted a net loss of $340.3 million, compared with a profit of $234 million a year earlier.  I must admit that the only thing shocking about Blackstone's loss is that it isn't significantly higher.  According to Bloomberg's report on the earnings announcement, the company wrote down its corporate holdings by about 7.5% and its real estate investments by 9%.  Since the beginning of the year, the firm has reduced the value of about a third of the 40 companies it owns.  Seriously?  It has written down the value of ONLY one third of its portfolio?  I admit I haven't a clue as to what assets Blackstone owns, but I can throw out a few thoughts that might put it in perspective: 

• S&P and Dow down over 35% YTD
• Commercial real estate prices down at least 15-20%, although nobody even knows because NOTHING IS TRADING
• All LBO debt getting marked at around 70 cents on the dollar, although even this is highly suspect as very little is trading
• Zero financing available for any new deals

So really, are we sure that we only want to mark down that commercial real estate by 9% and the corporate portfolio by a mere 7.5%, or are we going to put the crack pipe down and start talking some real numbers?  If that weren't enough, as I mentioned in my last mockery of Blackstone back in May, the company expects to post net losses during the next five years due to vesting expenses.  Why anyone is willing to subsidize insane compensation costs just for a "piece of the private equity pie" is beyond me and yet people buy this stock.  Who are these people?  Even at $7.55 a share, who on earth thinks this is a good business model anymore and that the company's biggest losses are behind them?

The Wall Street Journal had a great story about Blackstone Group's LBO of Hilton Hotels completed roughly a year ago.  It is certainly worth a read for anyone who has forgotten how preposterous the private equity boom period became.  Blackstone put in $6 billion of equity, its largest investment to date, and financed the balance of the $26 billion takeover with debt.  Blackstone paid 13 times estimated 2008 pre-tax cash flow for the company (translation: steep.)  Mind you, this was five years into an economic boom that was already looking tired when the deal was done.  Currently, the hotel chain's closest rival, Starwood, trades at about seven times before-tax cash flow.  The best part, the part you're really going to love as a US taxpayer, is that $4 billion of Hilton's LBO debt now sits on the Fed's balance sheet and we own it.  Apparently the Hilton LBO debt is part of the $30 billion in illiquid assets that the Fed guaranteed for JP Morgan when JP bought Bear.  The funny thing is that Lehman also held some of the Hilton LBO debt when it went bankrupt.  No doubt the bankruptcy court is working on finding a bid for the garbage so that Lehman creditors can be repaid.  Maybe the Fed can buy it and add it to the kitty.

At least the backlash against the private equity community is in full swing.  President-elect Obama will more than likely try to increase taxes on private equity investors from the long term capital gains tax rate to the ordinary income rate.  But not to worry, these guys won't see capital gains again for a really long time.    

Chrysler Caught in Catch-22

Chrysler has to refinance $30 billion of its lending arm's working capital by Friday.  However, the automaker has to offer financing to sell its vehicles, but has been losing money on leased cars as resale values have plummeted on SUV's.  What do you do when you need to offer financing to your customers to sell cars but you depend on your lenders to stay in business and they're not happy that you're losing money?  Chrysler has chosen to stop offering auto leases through Chrysler Financial beginning in August.  This drastic move is more than likely meant to placate Chrysler's lenders as it attempts to renegotiate its credit facility.  Not surprisingly, the terms on the new credit facility will be much less friendly to the automaker, in the neighborhood of roughly 2% over Libor (about three times higher than last year when it was originally negotiated.)  In summary, a combination of reduced sales from its inability to offer leases and significantly higher borrowing costs seem likely to torpedo the company in the very near future.  Not good news for Cerberus Capital, the private-equity firm that is attempting to bring the US automaker back from the brink, or its investors.  Nor is this positive for consumers who liked the idea of leasing so they could trade in cars every couple of years.  This may be even worse news for investors in Chrysler's debt as it does not bode well for the company's ability to generate revenues to cover its debt service.  Maybe if Cerberus wants to keep Chrysler afloat it should just start buying its vehicles in bulk.  That seems to be the only way out of this pickle. 

Cerberus Newest Fund Down 1%?

According to Bloomberg, Cerberus Capital Management LP's newest fund is down 1% since inception in November 2006.  The $7.5 billion Cerberus Institutional Partners Series Four lost $32 million on $3.3 billion in investments through March 31, according to a copy of the investor presentation that Bloomberg News obtained.  Although this only includes results through March 31, I am going to have to call them out on that one.  There is no way that fund is only down 1%, given that it has huge stakes in Chrysler and GMAC, both of which are teetering on the brink of bankruptcy.  Let me be clear that I have absolutely no inside knowledge of the situation.  I barely have any outside knowledge.  I only know what I read in the financial press.  I know, for example that Cerberus led a group of investors that paid $7.4 billion for a 51% stake in GMAC in 2006.  I also know that GMAC completed a very complicated $60 billion restructuring to avert bankruptcy on June 4th due to its ailing ResCap mortgage unit that is bleeding cash.  I'm thinking, maybe, just maybe, they've lost a bit more than $32 million on just the GMAC investment?  Call me a crazy skeptic....  

Rescap Sells Assets to GMAC and Cerberus to Stay Afloat

In yet another shocking securities filing, ResCap has announced that it will need to raise $1.4 billion more than originally stated before June 30th to stave off bankruptcy. It appears as if the company's problems, which may seem complex on the surface, boil down to a simple mathematical error. ResCap just can't seem to come up with one number that will plug the enormous money-sucking hole in its balance sheet. Alternatively, the company just wanted to force through the tender offer before announcing the severity of its liquidity problem. I'll let you mull that one over.
As recently as May 19th, ResCap had claimed that it only needed an additional $600 million once the tender offer was completed. Just two weeks later, it has more than tripled that number. What is the company doing to secure further capital? It is selling assets to its parent GMAC, as well as the bozos at Cerberus, the private equity firm that took a majority stake in GMAC two years ago subsequently flipping it it to a bunch of private equity Wannabes. Cerberus may be trying to make nice with the investors that it roped into the GMAC deal two years ago when it was "hot." But a closer analysis of the new financing arrangements shows that Cerberus is once again looking after its own hide. Cerberus could just inject fresh capital into the firm in the form of equity, yet has chosen to purchase assets from the firm at distressed prices instead. A very complicated host of assets sales and collateralized loans have been announced. GMAC will increase the size of its loan to ResCap to $1.2 billion from $750 million. ResCap will draw $450 million of that money today. GMAC will buy ResCap's resort-finance business as well as some receivables, while Cerberus will purchase $475 million worth of model-home assets. Cerberus has also agreed to buy or backstop sales of $950 million in mortgage loans or MBS, some of which may not be making timely payments. However, and this is a big "however", some of the assets Cerberus will buy may have been pledged as collateral backing notes that will be exchanged for old ResCap debt or a planned credit facility with GMAC. Translation? We're going to work out all the details in bankruptcy court in a few months.

Cerberus Left Other Investors Holding the Bag on GMAC and Chrysler

Cerberus, the private equity firm now notorious for making a host of lousy investments at the height of the private equity boom, has apparently grown tired of the relentless negative publicity. A mysterious report has somehow been leaked to the Financial Times revealing that Cerberus sold "significantly more than half" its equity stakes in GMAC and Chrysler to around 90 other unfortunate losers. While this may improve Cerberus' reputation as a shrewd investor, it may have dented its reputation as a trustworthy partner. In fact, some of those who purchased stakes were Cerberus's own investors. I would be interested in being a fly on the wall the next time Cerebrus attempts to raise capital for a new fund:

Cerberus partner: (calling former investor) Hello! Cerberus here. Can we count on you for a substantial contribution to Cerberus Capital Partners We'll-Make-It-Back-Fund I?

Former Investor: Ha ha ha ha ha ha! Hold on please. (puts phone down, rolls around on the floor clutching stomach) Ha ha ha ha! (picks up phone again) Um, no.

Cerberus partner: How about Cerberus Capital Partners We'll-Make-It-Back Fund II?

Former Investor: Click.

According to the Financial Times story, the investors in the GMAC deal extended beyond Cerberus's investors. Other private equity and hedge fund players were interested in piggy-backing on Cerberus's deal. Cerberus invited 50 hedge funds to its office for a presentation outlining the GMAC investment in 2006. Investors weren't given an opportunity to perform much due diligence if they wanted a piece of the deal but were told to "trust" Cerberus. Considered a "hot deal" at the time, many investors chose to trust Cerberus' due diligence and took part in the investment because they were friends of Steve Feinberg, the founder of Cerberus. If I were an investor in a fund where I was forking over management fee after management fee and I discovered that the fund invested in a deal based on a friendship, without performing any due diligence, I would immediately pull my money. Of course, that is easier said than done, as some of the investors on the list are having trouble figuring out where all the money went (Citigroup and DB Zwirn just to name two.) Once again, further evidence that all sorts of absurd activities occur at the peak of any bubble. Something tells me the stories are just going to get better and better...

ResCap Bondholders Begrudgingly Accept Tender Offer

Residential Capital announced that the company could go forward with the $14 billion proposed tender offer to stave off bankruptcy. ResCap, the mortgage finance unit of GMAC, has been hit very hard by the credit crisis. The company had losses totaling $5.3 billion in the past six quarters, with no end in sight, threatening its ability to remain an ongoing concern. Although the holders of the debt threatened to oppose the restructuring, they ultimately had little choice as any holdouts to the plan would have become subordinated to a very long line of creditors. Simply stated, since bonds are no longer issued in paper due to advances in technology, their claims on the company would've actually been worth less than toilet paper.
The tender offer requires debt holders to exchange their notes for new notes with longer maturities. Holders of the short term debt will receive new notes worth as much as 100 cents on the dollar, while longer term debt holders will receive new notes worth roughly 80 cents on the dollar. GMAC, the parent, would help finance the tender offer by increasing its credit line to ResCap, again, by $3.5 billion. GMAC's credit line would become senior to all the existing note holders. What ResCap should've done was issue PIK toggle bonds, similar to those I mentioned in my prior post this morning. If you have the option of rolling debt into more debt, you don't even need to get approval to screw the debt holders. The buyers of the debt sign up to get screwed from the get go.
Why should anyone even care about yet another mortgage lender going bankrupt? Well, Rescap's inability to remain an ongoing concern would threaten GMAC's viability, which would hurt GM. Most people who purchase cars from GM use GMAC for financing. Furthermore, GM still owns 49% of GMAC, meaning it would take a financial hit as well. The possible failure of ResCap would clearly have negative reverberations beyond the mortgage finance market. Why investors are willing to take this risk by purchasing shares in GM is a complete mystery to me. Anyone with any insight is welcome to comment.

Payment-In-Kind Bonds Deliver No Payment

According to the Wall Street Journal, more and more companies that issued PIK toggle bonds during the private equity boom are opting to pay investors more debt rather than interest. For those unfamiliar with PIK toggles, it is debt issued with the option to substitute interest payments for more debt. The option resides with the issuer, of course, not the investor. This structure was very popular during the peak of the private equity boom when debt investors were tripping over themselves to pay absurd prices for leveraged loans. Private equity sponsors took full advantage of the deluge of cash at the time by issuing bonds with PIK toggles to give themselves a little breathing room in case the companies ran into liquidity problems in the future. What does a company with liquidity issues need more than anything else? I'll let you in on little secret: it is not more debt. Granted, not having to make an interest payment is a temporary respite from possible bankruptcy, but it only delays the inevitable.
Seven companies have taken advantage of the PIK toggle option on $2.4 billion in bonds so far. Claire Stores, a retailer taken public by Apollo a year ago, is a prime example. Claire Stores bonds now trade at $.58 on the dollar. Investors were absolutely shocked! Personally, I would be shocked if every single PIK toggle bond issued didn't end up eventually taking this option. It's like asking how many people who took out option arms expected to make the full payment on their mortgage. The answer? Zero. Why? Because none of them could afford to make the full payments in the first place. This is why default rates on option arms are skyrocketing. Anyone with half a brain should have expected the same out of the companies that issued PIK toggle bonds. Leveraged loan investors who bought into these loans deserve exactly what they are getting: no cash, just a tenuous IOU.

Blackstone Posts Loss That Confounds Analysts

Blackstone Group, the publicly traded asset manager widely known for its buyout business, reported a loss of $66.5 million attributable to declining fees in every single one of its businesses. The first-quarter loss, which excluded some compensation costs, was $.06 a share, compared to average estimates of $.12 a share profit that analysts had been expecting. Profits? From a private equity firm? Did the analysts' Wall Street Journal subscriptions expire in December? Blackstone completed exactly one leveraged buyout in the quarter for $1.2 billion, compared to $42 billion in deals the previous year. Furthermore, revenues declined by 94% in its real estate business and its buyout funds. The hedge-fund unit was the real performer with a revenue drop of only 81%. Those guys should expect a big fat bonus. Speaking of compensation, Blackstone's net loss was actually $251 million including costs related to the vesting of executives' ownership stakes as part of the initial public offering in June. Let's see, really lousy asset management performance, yet really high compensation costs. I'm sure if performance turned around, compensation would increase even more. Very interesting negative and positive correlation between compensation and performance. The company expects to post net losses during the next FIVE YEARS due to vesting expenses. Anyone who still wants to buy the stock after reading the last sentence may be interested in investing in a partially completed condo project I'm working on in Las Vegas. Please call me.

Linens 'N Things Officially Bankrupt

Linens 'n Things filed for Chapter 11 bankruptcy protection today, becoming the first of what will probably be a series of high profile bankruptcies of LBO's completed in the past few years. As I mentioned in my prior story on Linens 'n Things, the company has been on a money-losing tear for the past two years, pretty much since the day Leon Black's Apollo purchased the retailer for $1.3 billion in February 2006. Apparently, Apollo grew weary of supporting the retailer and chose the bankruptcy route, thus screwing the debt investors who were foolish enough to believe the company's cash flow could support a ridiculous debt burden. Linens 'n Things received $700 million in debtor-in-possession financing from GE Capital Corp, allowing the company to continue operations but further screwing the debt investors, as debtor-in-possession financing becomes senior to existing debt holders. If you still think it's a good idea to invest in Apollo's impending IPO after reading this story, please call me. I have some great condos in Miami to go that are perfect for an investor just like you!

No Money, Just Linens 'N Things...

Linens 'N Things is expected to file for bankruptcy on Tuesday. Separately, and yet entirely related, Apollo is going ahead with its IPO plans, despite the turbulent market. How are these two stories related? Because Apollo, the highly regarded private equity firm run by Leon Black, took LNT private in February of 2006 in a $1.3 billion buyout. Maybe Mr. Black thought he could get his firm's IPO out the door before the LNT bankruptcy filing in order to cash out before returns in his funds suffer? I'm just speculating, of course.

Who on earth could've seen the surprising news of LNT's bankruptcy coming? Did the news of LNT's $154 million loss in 2006 not ring a bell for investors and cause them to view other similarly debt laden deals with caution? No. The private equity boom continued for at least another year. But perhaps it is finally starting to dawn on people that not every company in America needed to be loaded up with debt and taken private, unlike the definitive claims of all of those nauseating editorials I had to read in the Wall Street Journal during the height of the boom about how private equity "creates efficiency." Maybe, just maybe, the whole boom was based on financial engineers taking advantage of the tax benefits of issuing debt and temporary insanity in the debt markets. Perhaps, private equity players are starting to think "hmmm, maybe piling a ton of debt on a bunch of highly cyclical businesses (hello Freescale and Chrysler) five years into an economic boom was perhaps idiotic." Yeah, if I were Mr. Black, I'd be planning my IPO too...

Goldman's Blankfein Says End to Credit Crisis is Near..

Blankfein claims we are in the third or fourth quarter of the credit crisis, although he hedges by saying that the fourth quarter of most sports events tends to be the longest. Separately, yet totally related, Goldman punted $500 million of Chrysler bonds for $.63. So, let me get this straight, the credit crisis is almost over, yet GS is puking bonds at $.63. That's a mighty big discount if this credit crisis is really just a mark-to-market phenomenon and not indicative of future defaults. In Blankfein's defense, it is his job as CEO to try restore confidence at a meeting of GS shareholders. Furthermore, I'm certain that every dealer involved in the bond syndication of this deal knew it was a turkey at the time, but the capital markets shut down abruptly before they could offload any of the bonds.

Just how big of a turkey this deal would turn out to be didn't start to dawn on anyone until, oh I don't know, maybe three days after the deal closed. Was it the $2.7 billion in losses that Chrysler reported immediately following the buyout that gave it away? Or maybe it was the move by Cerberus, the PE firm who took Chrysler private, to hire Robert Nardinelli, a non-car-industry executive to run Chrysler? Robert Nardinelli, for those who don't recall, is the genius who was sacked from Home Depot after six years of below average performance (the stock declined while rival Lowe's rose significantly), because he wouldn't take a pay cut. I guess no CEO can be expected to live off of less than $200 million. At any rate, if I were GS, I'd be looking to hit the next bid behind that $.63...

Carlyle wants back in!

What do you do immediately following an incredibly embarrassing blowout of one of your funds? Raise a new one! Carlyle announced it has raised $1.35 billion for a distressed debt fund. I can't imagine being the tool at Carlyle tasked with calling all the investors to say "yes, yes, I know, you're never gonna see that money again. But have I got a deal for you today!" Wouldn't you just hang up the phone? But no, someone with money to burn said "Here, take $1.35 billion! Go buy back all that debt you had to puke to meet margin calls! We'll make it back! I know we will!" I'm not saying I wouldn't give $1.35 billion to a distressed debt fund. It's probably a great idea right now. I'm just saying I wouldn't give it to the guys who just BLEW OUT LAST MONTH! I'd give it to Paulson. Or Warren Buffet. But Carlyle? No.