Banks raise $170bn for funds to buy stuck LBO debt to flatter balance sheets

Discussion in 'Wall St. News' started by ASusilovic, Oct 3, 2007.

  1. Source :

    Is this the ultimate get-out-of-jail-free move? The FT reported this week that both KKR and Citigroup are in talks to set up a fund to hoover up impaired LBO debt.

    The obvious irony being, of course, that both KKR and Citigroup were the LBO market’s prime movers earlier this year. Citi’s Q3 results bore that out - the bank financed more than $38.4bn of LBOs and hasn’t been able to syndicate all those debts.

    So why this sudden bout of noblesse oblige? There are clearly discounts in the LBO market at the moment - and if demand for CLO paper picks up again, then there will be plenty of opportunities for syndication. So it makes sense to turn this quarter’s losses into next quarter’s gains.

    But perhaps more cynically, setting up funds such as Citi’s is a much a way of avoiding losing more money as it is of making it. Citi has already suffered huge losses on its frozen LBO portfolio which was marked-to-market in its Q3 results. Selling those LBO loans at attractive prices would be a powerful hit for banks.

    Says Yves Smith at Naked Capitalism

    Now you wouldn’t sell a lot of paper to the fund, that’s asking for liability problems. But small transactions often legitimately go for higher prices than large ones, and a bank could conceivably sell a small participation in a few deals at a not-egregious-if-you-are-retail level above where the market really was (say 95 when the market would probably be 92). Now it would probably be pushing it to stuff your own paper into your own fund, but there are enough banks in the same boat that mutual backscratching isn’t out of the question.

    Other banks - including Lehman Brothers - are already known to be setting up similar funds, reports the FT on Wednesday. There’s a ballpark figure of $170bn as the total that banks are raising for funds to buy LBO debt.

    If that’s the case, of course, then we assume that it really won’t be long at all before the current pricing of LBO debt snaps back to pre-crunch levels. After all, even in the current empty market, it’s only trading with a relatively slight discount of around 2-4 cents in the dollar. On that assumption, it’s perhaps unrealistic that these LBO debt funds have exploiting the current dearth of buyers as their prime motivation - sure those loans are cheap, but pour $170bn in, and they ain’t gonna stay that way. It seems instead then, that it’s all about restoring healthy pricing levels to the market.

    The big indicator will be at what price the first loans will be sold to the new funds. The worry is definitely taking hold among investors, says the FT, that this is all just a bit of a ruse to flatter the banks’ balance sheets.
  2. This is financial recycling at it's finest. The only thing missing from the picture is an IPO, but I'm sure we won't have to wait too long.