Who the Hell is Lone Star?

[Joanne98]

Private Equity is all the rage. We know Carlyle, Cerberes but who is this?

Lone Star loves toxic mortgages
Posted Jul 30th 2008 10:10AM by Tom Taulli
Filed under: Deals, Industry, Private equity, CIT Group (CIT), Merrill Lynch (MER)

Lately, there's been lots of dire talk about the private equity world. Returns are likely to be much lower and perhaps there will be many firms that shut down.

Indeed, such things may turn out to be true.

However, whenever there is extreme turbulence and a pervasive credit crunch, there are also big opportunities to make money. Just look at Apollo Management and Cerberus Capital. Both firms made a killing during the rough early 1990s.

Fast forward to today, and we may be seeing something similar with one of the top beneficiaries possibly being Lone Star Funds. Yes, this week the fund purchased a collateralized debt portfolio from Merrill Lynch & Co. (NYSE: MER) at 22 cents on the dollar . The face value on it? About $30.6 billion.

This is not a one-off deal as it looks like Lone Star is hungry for high-risk debt. For example, the firm recently purchased the mortgage division of CIT Group Inc. (NYSE: CIT) and acquired Bear Stearn's mortgage segment. There was also the purchase of Accredited Home Lenders Holding Co. for $295 million.

All in all, this is risky stuff, but the chief of Lone Star, John Grayken, has lots of experience with structuring complex deals for distressed financial institutions. During the early 1990s, he worked for Robert Bass -- a Forth Worth billionaire -- and made a variety of deals for ailing S&Ls.

Then, in 1995, he started Lone Star, where he focused on troubled financial institutions in Japan and South Korea.

Lone Star's recent dealmaking does not necessarily mean that the credit crunch is thawing and the housing/mortgage markets are coming back. After all, private equity firms can hold investments for several years.

Then again, such investments are a good sign since they show that the smart money does see value in the marketplace.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar Online Guide to Decoding Financial Statements. He also operates MergerBook.com.

Lone Star Lesson in Taking Advantage of CDO Markets
Merrill Lynch is selling a portfolio of collateralized debt obligations (with an original face value of $30.6B) to Dallas-based private equity firm Lone Star Funds for $6.7B, i.e. 22 cents on the dollar. What’s more is that Merrill is financing 75% of the deal so they’re only taking in $1.7B. An excellent deal by Lonestar and a great example of how private equity firms can take advantage of the current market.

August 4, 2008
HSBC renegotiates Korean Exchange Bank acquisition
by Gill Montia
Story link: HSBC renegotiates Korean Exchange Bank acquisition
HSBC is reported to be renegotiating the price of its proposed acquisition of a majority stake in Korea Exchange Bank (KEB), from US private equity firm, Lone Star.

[Joanne98]

1. Lone Star Funds, a distressed-debt investor in Dallas.

Lone Star Funds

Lone Star Funds is a private equity firm specializing in asset acquisitions, corporate acquisitions, company sponsorships, turnarounds, refinancing, and recapitalizations. In asset acquisition, the firm seeks to acquire secured and corporate unsecured debt instruments and real estate assets. In corporate acquisitions, it acquires controlling interests in the financial or real estate sector, for operational turnaround in a longer term hold strategy. In corporate sponsorships, the firm provides capital to companies in a bankruptcy or similar legal proceeding to allow the company to recapitalize, emerge from the legal proceeding, and turnaround its operations. It also provides short to medium term mezzanine debt or preferred equity financing for recapitalizations. The firm seeks to make investments for real estate development or major rehabilitation of existing assets in various property types. It seeks to invest globally. 2

Lone Star Funds is a leading U.S. private equity firm. Since 1995, the principals of Lone Star Funds have organized private equity funds totaling more than $13.3 billion to invest globally in corporate secured and unsecured debt instruments, real estate related assets and select corporate opportunities. 3

Its last fund, Lone Star Fund V, closed in September 2004 with $5 billion in commitments. The company currently manages six funds, worth a total of $13.3 billion. 5

Even so, Lone Star is in a better position to profit than most of its rivals because of the depth of its experience and because of K�ller’s wide range of contacts in Germany Inc. Under K�ller’s predecessor, Roger Orf, who is now at Citibank (C ), Lone Star effectively invented the German market for distressed debt, with deals such as the 2003 acquisition of the loan portfolio of bankrupt Gontard & Metall Bank. Since then, Lone Star and smaller players such as Los Angeles-based Oaktree Capital Management LLC have helped German banks chip away at a mountain of some $200 billion in bad debt, much of it stemming from ill-advised property investments in Eastern Germany. 7

Founded by John Grayken, its low-profile chairman, Lone Star specializes in purchasing distressed companies, reorganizing them and reselling them for a profit. The company also buys delinquent bank loans. 6

Prosecutors are investigating whether shares of Korea Exchange’s credit card unit in 2003 were driven down before the bank took it over. Prosecutors are also examining whether Korea Exchange Bank’s value was understated to enable Lone Star to buy the company at a low price three years ago. 8

Lone Star, for its part, says it’s ready to bid on whatever the market offers. One of its biggest deals in Germany was completed in two separate tranches in 2000 and 2002, when it bought whole blocks of half-finished communist-era apartments from the city of Berlin for $330 million. Lone Star completed and renovated the 5,000 flats, then raised rents. Indeed, the firm seems willing to take on any challenge as long as the price is right. 9

One person who has worked with Lone Star and declines to be named praises the extremely methodical way the firm analyzes the assets underlying the debt it is considering, then works out a business plan. The workouts are handled by Hudson Advisors, a Lone Star sister company that has developed its own analytical software based on its experience with troubled debt in the U.S., Japan, and other markets. 10

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Okay. I'm starting to get it.