Leveraged buyouts are back in the news this morning. The papers write that the Clear Channel Communications deal, which collapsed in recriminations between the private-equity firms who agreed to buy it and the banks who agreed to finance the LBO (debt-laden deal), is back on after a settlement brought all parties in for some pain in order to avoid a long and expensive court battle.
The Wall Street Journal and Financial Times both front the news on their investing sections and The New York Times puts it on C3. The deal for the radio giant would lower the price by $1.2 billion, or 8 percent, to $18 billion, and the buyers would have to pay a higher interest rate on their loans, which would still be likely money-losers for the banks.
The deal was one of the more prominent casualties of the credit crunch when it fell apart in late March after the banks who’d agreed to fund it backed out because they would have lost $2.7 billion or so instantly, because the price of debt like that had fallen so far since the deal was reached (the FT says the banks have already written down the loan commitments). The banks accused the buyers, Thomas H. Lee Partners and Bain Capital Partners, of getting cold feet for paying too much. They instantly sued each other and the trial was set to begin yesterday but was delayed as a deal neared, the NYT and FT say.
Whither the Clear Channel shareholders? A deal’s a deal, except on Wall Street. The FT says it’s “not clear” if the company’s board will agree to the lower price, but we’ll bet they will. It and its shareholders will be glad to not be taking an even bigger loss, and the papers say one of the biggest investors was deeply involved in the renegotiation.
The FT notes that the buyers had agreed to put up just 13 percent of the deal price in their own equity. It’s too early to say this is a sign of thawing in the credit markets, as the Journal points out on B6 that another radio deal, this one the $530 million LBO of Cumulus Media collapsed yesterday.
For me, a discount
Bloomberg writes that a European banking trade group is looking into conflict-of-interest rules after some private-equity firms bought their own debt at steep discounts.
The wire service says Kohlberg Kravis Roberts and PAI Partners have purchased loans from their takeover deals in the last few months and KKR is in talks to buy more.
Why does this matter?
They also create potential conflicts because buyout firms may join bank groups that determine borrowing rules for the companies they own.
“The concern is that a basic principle of syndicated lending, that each lender gets treated the same, is being violated,” Clare Dawson, executive director of the Loan Market Association in London, said in an interview.
Stupid lending, or slow economy?
Small-business loans are the latest pocket of credit land feeling the crunch, the Journal says inside Money & Investing.
The paper puts it well:
Missed payments and losses on small-business loans are surging at banks throughout the country that were so eager to pad their profits that they essentially threw typical underwriting methods out the window. Some lenders doled out small-business loans as if they were credit cards, relying solely on the personal credit scores of borrowers.
That meant many loans were made without assessing a company’s strategy or finances, even by banks that avoided subprime mortgages. Now the economic slowdown is leaving lenders with little or nothing to collect on many small-business loans in case of default.
The WSJ says banks “haunted” by their missteps are reining in credit, making operating a small business more difficult. It says one-fifth of Bank of America’s reserves for bad loans last quarter were for those made to small businesses. How did they lose so much money?
Among the selling points: entrepreneurs could borrow as much as $100,000 through an unsecured credit line even if they had been in business for just one day.
It’s hard to know, but we wonder how much of the losses is due to stupid lending and how much is because of the slowed economy?
MBIA takes another hit
In other credit news, bond insurer MBIA lost $2.4 billion last quarter, in large part due to a huge loss on credit-default swaps—contracts that insure against a security’s non-payment. But analysts said it will likely keep its AAA credit rating, which will stave off a domino effect of billions of dollars in bond write-downs for banks. The Journal’s Heard on the Street column takes the company to task for fluffing its accounting, saying it’s reminiscent of the “dot bomb” era.
The FT reports that a New York official wants to regulate the $62 trillion credit-default swap market.
And Wachovia said it is under investigation by states and the federal government and being sued for its activities involving the frozen auction-rate securities market. The Journal says the market is shaping up to be a legal land mine for Wall Street.
The Los Angeles Times says “investors are increasingly throwing in the towel” on mortgage lenders in Southern California. Which is saying something, since the towel-throwing has been going on for more than a year now. IndyMac was the latest with bad news yesterday, reporting a $184 million loss and suspending its dividend and preferred-share payments—and it wasn’t even in subprime, preferring the relative “safety” of Alt-A mortgages (“liar loans” made to borrowers with better-than-subprime credit).
Here’s an analyst talking about IndyMac’s CEO, and it’s the Quote of the Day:
“Mike said today that they’ve turned the corner,” Cannon said. “But he’s said that so often that by now they’ve gone around the block at least once.”
The Journal says the bank may have to raise capital. Get in line.
Menthol missing from cigarette-regulation bill
The NYT on A1 looks at the legislation winding through Congress that would let the Food and Drug Administration regulate tobacco for the first time. The bill would ban flavored cigarettes like clove and cinnamon, the Times says, but let menthol smokes go and that raises public-health concerns for the black community, three-quarters of whose smokers like their cigarettes minty fresh.
The paper says banning menthol is off the table because it represents more than a quarter of the $70 billion in cigarettes sold in the U.S. (every year, we presume), something public-health officials call a “cave-in to the industry.” One large study found that menthol smokers are 30 percent less likely to quit smoking than regular smokers and 89 percent more apt to relapse.
We suppose that by now, in this eighth year of the Bush administration, we should be inured to its Orwellian-ness, but this is still remarkable:
Despite the support of Mr. Kennedy and 56 co-sponsors in the Senate, the legislation faces some determined opposition from tobacco-state lawmakers who resist industry regulation. And the White House has said it opposes the legislation, arguing that F.D.A. regulation could create the false impression that tobacco is safe.
Can’t they come up with anything better than that?
In a sidebar, the Times looks at the role marketing has played in the African-American taste for menthol cigarettes. It notes a report that magazine advertising for menthol smokes was 76 percent of the total in 2006, up from just 12 percent eight years earlier.
Makes as much sense as AOL-Time Warner
Hewlett-Packard is near a $13 billion deal for Electronic Data Systems, in a bid to take on IBM in the fast-growing computer-services business, the Journal says in its lead A1 story.
Fast-growing businesses are clearly deal-fertile territory, but this one has some glaring problems. The WSJ notes that H-P “already is a sprawling conglomerate” that would have to “digest a large company with a starkly different culture than its own” while the NYT on C1 says:
The business has long been rough—with competitors eking out low profit margins—but it has become particularly challenging in recent years as companies award contracts to outsource work to overseas companies, notably in India, that pay lower wages.
Brazil became the latest country to form a so-called sovereign-wealth fund, this one worth up to $20 billion. The Journal puts the news on page one and expands on it to say the country is entering the “front rank of new economic powers.”
Brazil has recently seen its debt upgraded to investment grade, discovered a giant oil pool off its shores, and is growing at 5 percent, aided by a stable currency, “a key ingredient that had long eluded it,” the WSJ says.
What Pearlstine-to-Bloomberg means
The NYT on its Business Day front says the appointment of former Time and Wall Street Journal editor Norman Pearlstine to a new job at Bloomberg signals that “the news business may be in the doldrums, but the competition over business news could be heating up.”
The paper says Bloomberg means to beef up its journalism, which already boasts 2,300 employees in 135 bureaus, by adding Pearlstine as “chief content officer.” Its news business has twice as many workers as it did seven years ago. The WSJ puts the news on B8 and says Pearlstine has a “mandate to look for opportunities for growth for the financial-news titan’s news service and television, radio, magazine and online products.”
Corporate tax payments lag
The WSJ says the Treasury has received 15 percent fewer corporate income-tax payments so far this year, a sign of the slow economy that will help blow a (bigger) hole in the federal budget deficit. But individual receipts were up 6 percent.Ryan Chittum is a former Wall Street Journal reporter, and deputy editor of The Audit, CJR's business section. If you see notable business journalism, give him a heads-up at firstname.lastname@example.org. Follow him on Twitter at @ryanchittum.