WSJ Follow Up to Finance is a Scam

by Kaiser Edamame

Today, the WSJ has an article on the recent syndications in the leveraged loan market of formerly hung deals that outlines in detail the “Finace is a Scam” piece from JD last week.

Yet for all the relief among bankers, the sales haven’t come easily — or profitably. They have offered only the highest-quality portions of the debt for sale, and that at a loss. They have also made concessions that could come back to hurt them, such as selling the debt at a discount while the huge supply raises questions about how long both Wall Street’s united front and the upbeat mood will last.

So far, what has been sold is a drop in the bucket. Standard & Poor’s Leveraged Commentary & Data estimates that about $30 billion of a total of $310 billion in North American LBO loans have been sold so far. As much as $100 billion in debt is due to come to the market in the next 30 days alone.

A week before the W Hotel presentation, banks successfully orchestrated the sale of the first big chunk of the $24 billion debt for the First Data buyout. They surprised even themselves by selling almost double the amount planned. The bad news: to accomplish that they agreed to sell the debt at 96 cents per dollar, locking in losses after their fees were figured into the deal.

In some cases, private-equity firms whose deals the debt is financing were among the bigger buyers of the debt. KKR, for example, expressed interest in purchasing a large amount of First Data debt, eventually receiving a $400 million allocation, according to people familiar with the deal.

Recommendation: A portion, if not all, of that $400mm First Data ticket from KKR was financed by Citi. $400mm is an extremely large amount of loans to buy in one deal. Citi and other banks probably provided similar financing to other hedge funds and private equity players; essentially on a net basis, not really selling these loan assets but paying a fee (on top of the discount 96 price or whatever) to get these loans off their books and getting publications to report that these deals have cleared the market with the hope that the banks can then move the rest of the overhang, which is an actual order of magnitude larger than what the banks have moved since the credit crunch began. But don’t worry, credit markets are fine!

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