I have been wondering, and worrying about leveraged corporate debt (as another domino)

[salin]

Over the bush years, there seems to have been an escalation of leveraged corporate buyouts. Given what we learned about the "fancy" structures used to hide debt ala Enron, and what we have learned about the effect of easy credit (due to the feds low rate binging that led to lower concerns for the ratio of risk on financing that contributed to the sub prime crisis), I have had this long-standing worry.

So I did a little googling - learned some, but most of what I found went back to analyses of the junk bond era. So then I tried news.google - to see what has been written about the topic in the last month, as the severity of the credit crises has become more clear. Here are some of the items that I found:

Moody's Say Older Debt
May Carry More Risk
By ANDREW EDWARDS
March 13, 2008 11:42 a.m.

Moody's said many older corporate leveraged loans' terms were "relaxed" in the loose-credit markets of the last two years, implying that older-vintage debt deals may not be as safe as previously thought.

Loans from 2006 and early 2007 -- when buyout shops were piling on leverage willy-nilly, and second liens were in vogue -- were thought to be at the heart of the projected deterioration in corporate credit, but Moody's research implies that the trouble may go deeper.

"Because of the large number of easing amendments, these older-vintage loans should not be considered safer than those loans issued when looser lender protections prevailed," said Moody's Senior Vice President Neal Schweitzer.

The loans -- going as far back as 1999 -- were amended to alleviate "financial stress caused by deteriorating fundamentals or to accommodate merges and acquisitions or leveraged buyouts" in 2006 and the first half of 2007.

More at: http://online.wsj.com/article/SB120542116929933513.html?mod=googlenews_wsj

Note - that line - changing (relaxing loose credit standards) to finance debt - to accommodate mergers and acquisitions or leveraged buyouts. Does this mean that the lack of due diligence we have seen in lenders (from mortgage brokers, to the rating organizations and the investors) in the sub prime debacle was also running amok in corporate refinancing to allow for some of the mega mergers and buyouts of the last year or so?

Want to feel better? Some of the big players are now turning their eyes to the "opportunities" presented with corporate debt. Read on from just the other day:

Apollo Turns to Distressed Debt, Including LBOs (Update1)

By Jason Kelly

March 12 (Bloomberg) -- Apollo Management LP adapted to the leveraged-buyout freeze by investing $1 billion in distressed securities, including the debt of companies it already owns, founder Leon Black told investors.

``We are doing exactly what you would expect of us in this market -- using our distressed expertise and appetite for complexity to find investments in good companies that are available at significantly discounted levels,'' Black wrote in a Feb. 29 letter to clients of the New York-based firm.

Apollo's most recent funds are ``in very good shape,'' Black wrote, even though the buyout of real-estate services firm Realogy Corp. has been hurt by the worst housing market in a quarter century and its Linens 'n Things Inc. and Claire's Stores Inc. are struggling as retail sales growth slows. Fund V, a $3.8 billion pool started in 2001, has returned 3.5 times invested capital, according to Black. Holdings of the $10.1 billion Fund VI were valued at $1.5 billion above cost as of Dec. 31.

---

Black's view on distressed investing was echoed by Blackstone Group LP founder Stephen Schwarzman, who told investors on a March 10 conference call that his New York-based firm is eyeing leveraged loans it considers unfairly discounted by investors amid broader credit-market worries.

``Leveraged loans is a very interesting area and getting more interesting,'' Schwarzman, 61, said. ``Some of it is trading at distressed debt levels and it happens not to be distressed. It's a distressed market.''

more at: http://www.bloomberg.com/apps/news?pid=20601087&sid=a0k_z4K3RK2c&refer=home

Sounds like more trying to make oodles of money, on "complex" structures and deals that no one can understand, in order to suck even more equity out of the overall economy - now with corporate entities being the target.

Now lets read an item about the firms that have been doing the buyout/merger mega deals of late:

March 11, 2008
Buyout Industry Staggers Under Weight of Debt
By MICHAEL J. de la MERCED
With their big paydays and bigger egos, private equity moguls came to symbolize an era of hyper-wealth on Wall Street.

Now their fortunes are plummeting.

Celebrated buyout firms like the Blackstone Group and Kohlberg Kravis Roberts & Company, hailed only a year ago for their deal-making prowess, are seeing their profits collapse as the credit crisis spreads through the financial markets.

Investors fear that some of the companies that these firms bought on credit could, like millions of American homeowners, begin to buckle under their heavy debts now that a recession seems almost certain. The buyout lords themselves suddenly confront gaping multibillion-dollar losses on their investments.

---

Blackstone and others argue they can run these businesses more efficiently — and therefore more profitably — than they could as public companies. Now, the bankers and investors who financed the boom in corporate takeovers are running for the exits. Loans and junk bonds that deal makers used to pay for the acquisitions — debts that must be repaid by the companies, not the deal makers — are sinking in value.

more at: http://www.nytimes.com/2008/03/11/business/11equity.html?_r=1&ei=5087&em=&en=7cbba3cefda33d19&ex=1205380800&pagewanted=print&oref=slogin


Folks, this is not being written about on the front pages, but buried more in business sections. This has the possibility of taking down a lot of businesses. While all the news is on the sub prime crisis and the buyouts (ala the feds) of the hedgefunds for the mortgage-backed debt, there is little attention to the activities that look like they are escalating. Much of this is being done by private equity groups - which I would guess means less regulation.

I call out to DU. Let's get educated on this ASAP. Then what? Call congress (hearings? Need for regulations?) Call the media? I don't know - but we saw the problems in the housing market two or more years ago when we (as a community) would write and warn about the dangers of the 'exotic' new lending for mortgages (new in that they did not used to be mass marketed) per the ARMS an no-down payments.

This seems to be a newer development - but one that could suck out the value of many, many corporations. And what would that do to the economy? There just isn't enough money to keep "buying out" the crises. I hate to sound alarm bells (when so many are already ringing). Or perhaps I am misreading all of this.

Thoughts? Comments?