Private Equity – Page 2 – Liberty Blitzkrieg

Junk Borrowers Are Increasingly “Adjusting Earnings” to More Easily Sell Debt

May 28, 2014 by Michael Krieger

Last week, I wrote a post highlighting increased leverage in private equity deals and the fact that the Federal Reserve was warning of such practices in the piece: Leverage in PE Deals Soars Despite Fed Warnings. In it, I highlighted how 40% of PE deals in 2014 have used leverage ratio above 6x EBITDA, despite Federal Reserve and the Office of the Comptroller of the Currency guidance last year to not breach that ratio.

I noted how ridiculous it is for the institution most responsible for all of the current market insanity to try to come out and talk down leverage ratios. The primary reason all of this craziness is occurring is because the Federal Reserve has intentionally lowered interest rates to such an extent that investors feel they have no choice but to chase the riskiest assets just to catch a few additional basis points. Now we see that junk borrowers are increasingly using tactics such as “add-backs” in order to make earnings look better. This allows low quality borrowers to borrow, while at the same time providing an excuse for investors to buy garbage.

Think I’m exaggerating the problem? According to Bloomberg, 66% of junk-rated bonds sold this year scored by Moody’s Investors Service included at least one adjustment to earnings the credit rater considered “aggressive.” In 2011, the number was just 40%.

Everybody wins right? Wrong. Society will pay a very heavy price for this ultimately.

Leaked Documents Show How Blackstone Fleeces Taxpayers via Public Pension Funds

May 5, 2014May 5, 2014 by Michael Krieger

The following story by David Sirota at PandoDaily is simply excellent. It zeros in on the secretive and rapidly expanding relationship between private equity firms and the public pensions that invest in them. It shows a crony capitalist love affair greased by lobbyist influence peddlers known as “placement agents,” as well as non-public agreements between PE firms and public pensions chock full of conflicts of interest, extremely high fees and underperformance. Unbelievably, in many instances the trustees of the public pensions are not allowed to know what funds the “fund of funds” invest in. This makes due diligence impossible, and in one particularly egregious example it led the Kentucky Retirement Systems to unknowingly invest in SAC Capital despite the fact it was under SEC investigation at the time.

Furthermore, with the Wall Street Journal reporting back in 2011 that $37 of every $100 dollars invested in Blackstone’s investment pool coming from state and local pension plans, it appears that taxpayers are once again being fleeced by the financial oligarch class. Additionally, it appears to answer a recent question I posed in my piece: Is the Credit Bubble Popping? Carlyle Group Warns on Frothiness and Junk Bond Deals Get Pulled. After reading about a growing pool of insane “dividend deals” and payment-in-kind” notes being issued, I wondered who in their right mind was buying these deals. Well, based on the complete lack of competence and due diligence happening at public pension funds, I think we have solved part of the mystery.

The chief villain in this article will be no stranger to readers of this site. It is Blackstone, the private equity giant who I have criticized many times on these pages for buying up homes all across America in “all cash” deals, making homes unaffordable to average American peasants. Of course, Blackstone is just one of many, but given its size and influence, highlighting its practices is probably quite representative.

Here are some excerpts from the article. Read it and weep:

When you think of the term “public pension fund,” you probably imagine hyper-cautious investment strategies kept in check by no-nonsense fiduciary laws.

But you probably shouldn’t.

An increasing number of those pension funds are being stealthily diverted into high-fee, high-risk “alternative investments” that deliver spectacular rewards for the Wall Street firms paid to manage them – but not such great returns for pensioners and taxpayers.

And yet… despite the fact that they deal with the expenditure of taxpayer money, the agreements between public pension systems and alternative investment firms are almost entirely secret.

Until now.

Thanks to confidential documents exclusively obtained by Pando, we can now see some of the language and fee structures in the agreements between the “alternative investment” industry and major public pension funds. Taken together, the documents raise serious questions about whether the government employees, trustees and politicians overseeing major public pension funds are shirking their fiduciary responsibilities under the law when they are cementing “alternative” investment deals.

The documents, which were involved in a recent SEC inquiry into the $14.5 billion Kentucky Retirement Systems (KRS), were handed to us by SEC whistleblower Chris Tobe, an investment consultant and former trustee of the KRS. Tobe has also written a book — “Kentucky Fried Pensions” — about the scandalous state of the Kentucky public pensions system.

The documents provided by Tobe (embedded below) specifically detail Kentucky’s dealings with Blackstone – a giant Wall Street investment firm which has deployed a platoon of registered lobbyists in Kentucky and whose employees are major financial backers of Kentucky U.S. Sen. Mitch McConnell (R).

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Is the Credit Bubble Popping? Carlyle Group Warns on Frothiness and Junk Bond Deals Get Pulled

May 1, 2014May 1, 2014 by Michael Krieger

Given recent geopolitical and macroeconomic events we are surprised at how well credit markets have been in 2014. The world continues to be awash in liquidity and investors are chasing yield seemingly regardless of risk. Leverage levels in the United States are increasing and rose by almost a full third over the past year while spreads between IG and HY are ~250 basis points below the 20 year average. Thus, the market is not assigning a significant premium to riskier assets. We continually ask whether the fundamentals in the global credit markets are healthy and sustainable. Frankly, we don’t think so.

– From Carlyle Group’s 1Q14 Earnings Conference Call yesterday

Over the weekend, I published a Guest Post on the bubble in the junk bond market titled: Is There a Massive High Yield Credit Bubble? If you haven’t read it already, I suggest doing so before reading the rest of this post.

The following piece builds on that prior one by highlighting some of the most absurd practices currently going on in the less creditworthy areas of the bond market. Signs that prove without question there is some sort of dangerous bubble already percolating throughout the credit markets.

The first of these are known as “dividend deals.” For those of you who are unfamiliar with them, you might not believe what they actually are. Basically, dividend deals are when companies owned by private equity firms tap the credit markets, and then a sizable percentage of the money borrowed is used to cut a check to the private equity owners themselves. Often times, the remainder of the debt is used to refinance existing debt.

Yes, you heard that right. The money earned from credit issuance isn’t used to expand operations, it isn’t spend on R&D, or anything productive whatsoever. Rather, funds are used to pay money directly to the private equity owners. From a private equity owner perspective, this is free money and of course they will take it. The insane thing is that creditors are willing to buy this garbage, and buying it they are. By the billions. In fact, you might own some in your mutual fund or pension fund. Who fucking knows, but this is insane.

The second sign of insanity is the increase in “payment-in-kind” notes. What this means is that interest on the debt can be paid back in, wait this is no joke, more debt! Even crazier, we are seeing examples of “payment-in-kind” notes being issued for the purpose of paying out dividends to private equity owners. I want to know which fund managers are buying these notes, and you should too.

Bloomberg recently covered the credit insanity in their piece: Dividend Deal ‘Epidemic’ Intensifies Junk Alarm. Here are some excerpts:

Companies owned by private-equity firms are borrowing money to pay dividends like it’s 2007, adding to concern among regulators that excesses are emerging in the riskier parts of the debt markets.

Borrowers including Madison Dearborn Partners LLC’s mobile-phone insurer Asurion LLC obtained almost $21 billion in junk-rated loans this year to enrich their owners, the most in seven years, according to Standard & Poor’s Capital IQ LCD. Some of the least-creditworthy companies are even selling notes that may pay interest with more debt, which BMC Software Inc. did for its $750 million payout to a group led by Bain Capital LLC.

“It’s kind of like an epidemic,” Martin Fridson, a New York-based money manager at Lehmann, Livian, Fridson Advisors LLC, who started his career as a corporate-debt trader in 1976, said in a telephone interview. “Once an investment banker sees that, he’s going to go to his clients and say, ‘Here’s a window of opportunity, you can take a dividend and get away with it.’”

That says it all right there. Why is private equity rushing to do these deals? Well, why does a dog lick its balls? Because it can.

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Mortgage Standards Are Plunging – It’s Muppet Fleecing Time All Over Again

April 21, 2014April 21, 2014 by Michael Krieger

In February, I highlighted the fact that subprime loans were about to make a return in my piece: Subprime Mortgages are Back…This Time Marketed as “Second Chance Purchase Programs.” In that article, I posited that with the “all cash” private equity shops and hedge funds no longer able to make good returns through buying new homes to rent, these investors would need some sucker to sell to in order to realize a return (Blackstone’s purchases have plunged 70% recently). That sucker, as always, will be the retail muppets, and those muppets will be lured in through subprime. This is now starting to happen in earnest.

The following article from the Wall Street Journal is both depressing and disturbing. Rather than allowing home prices to reset at a lower level after the 2008 crash where to normal buyers could afford a sane 20% mortgage, our central planners decided to do “whatever it takes” to re-inflate the housing bubble. This was achieved through wealthy investment pools buying properties for all cash. The trouble is, with home prices now inflated by these financial buyers and no real increase in wages, homes are simply unaffordable. So what do you do? You bring back subprime and get the peasants long real estate with essentially zero money down all over again. Truly remarkable.

From the Wall Street Journal:

While standards remain tight by historical measures, lenders have started to accept lower credit scores and to reduce down-payment requirements.

One such lender is TD Bank, Toronto-Dominion Bank’s U.S. unit, which on Friday began accepting down payments as low as 3% through an initiative called “Right Step,” geared toward first-time buyers and low- and moderate-income buyers. TD initially launched the program last year with a 5% down payment. It keeps the product on its books and doesn’t charge for insurance. Borrowers also don’t need to put down any of their own cash if a family, state or nonprofit group provides a down-payment gift.

So a measly 5% downpayment wasn’t good enough. They had to drop it to 3%. Frightening.

The changes also are a recognition by lenders that the business of refinancing old mortgages, which had been a huge profit center for banks, is nearly tapped out. To generate future profits, banks will have to compete for borrowers who may not have perfect credit or large down payments.

Valley National Bank, a community bank based in Wayne, N.J., lowered down-payment requirements to 5% from 25% this month on mortgages for certain buyers in New York, New Jersey and Pennsylvania. Next month, Arlington Community Federal Credit Union, based in Arlington, Va., will begin accepting 3% down payments on mortgages up to $417,000, down from 5%.

Yes, you read that right, 25% to 5%. Holy fuck.

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U.S. Banking Regulator Warns of a Credit Bubble Fueled by “Alternative Asset Managers”

January 29, 2014 by Michael Krieger

This isn’t the first time in recent months we have heard serious warnings of a new and potentially quite dangerous credit bubble. Recall back in September, when Blackstone’s head of private equity proclaimed that “we are in the middle of an epic credit bubble.” Well they should know, because according to the article below from Reuters, Blackstone and many other private equity firms are the “alternative asset managers” directly responsible for its creation.

I don’t know about you, but I just can’t wait for another bankster bailout!

From Reuters:

(Reuters) – A U.S. bank regulator is warning about the dangers of banks and alternative asset managers working together to do risky deals and get around rules amid concerns about a possible bubble in junk-rated loans to companies.

The Office of the Comptroller of the Currency has already told banks to avoid some of the riskiest junk loans to companies, but is alarmed that banks may still do such deals by sharing some of the risk with asset managers.

These clowns never learn, and why should they when society just bails them out from their stupidity.

“We do not see any benefit to banks working with alternative asset managers or shadow banks to skirt the regulation and continue to have weak deals flooding markets,” said Martin Pfinsgraff, senior deputy comptroller for large bank supervision at the OCC, in a statement in response to questions from Reuters.

Among the investors in alternative asset managers are pension funds that have funding issues of their own, he said.

“Transferring future losses from banks to pension funds does not aid long-term financial stability for the U.S. economy,” he added.

No, but it’s a great way to transfer risk to the muppets.

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Manhattan Apartment Rental Rates Drop for Third Month in a Row

December 16, 2013 by Michael Krieger

Now this is interesting. Investors looking at real estate should be aware of two main things at the moment. Those two things relate to what is really driving this centrally planned, manufactured rebound in U.S. real estate. It’s really a tale of two distinct trends. In formerly hurting markets such as Arizona, Nevada and Florida, private equity investors have flooded into what is a now gigantically crowded to “buy-to-rent” trade. Meanwhile, in the prime markets such as New York City and San Francisco, we have seen the “money laundering trade,” where rich oligarchs move their often ill-gotten gains into trophy real estate assets abroad.

We have seen many signs all year that the first key pillar to the manufactured rise in housing was becoming strained, as rents continued to rise while incomes continued to fall. It doesn’t take a genius to realize that this can only last so long, and many of the early investors in “buy-to-rent” have already gotten out or are trying to.

As far as the second pillar, well at some point the oligarchs will have purchased enough homes in London and Manhattan and then what? Interestingly, the seemingly unstoppable rental market in Manhattan is showing signs of cracking. What this ultimately means is unknown, but it’s an interesting data point nonetheless.

From Bloomberg:

Manhattan apartment rents fell for a third month in November and the vacancy rate reached the highest in at least seven years, signs the market is weakening amid a spike in homebuying and the lure of leasing in Brooklyn.

The median monthly rent in Manhattan dropped 3 percent from a year earlier to $3,100, according to a report today by appraiserMiller Samuel Inc. and brokerageDouglas Elliman Real Estate. The vacancy rate climbed to 2.8 percent, the highest since the firms began tracking the data in August 2006.

“With the scare about rising mortgage rates, it poached a lot of demand from the rental market,”Jonathan Miller, president of New York-based Miller Samuel, said in an interview. “On top of that, what else is poaching demand from the Manhattan rental market is Brooklyn.”

Manhattan landlords agreed to offer concessions, such as a month’s free rent, on 7.2 percent of all new leases in November, up from 4.2 percent a year earlier.

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Luxury Home Foreclosures Soar – Up 61% Versus Last Year

December 6, 2013 by Michael Krieger

I’ve always wondered what would happen once private equity players decided enough was enough and foreign oligarchs finished their real estate money laundering transactions. Well, we might be about to find out.

According to RealtyTrac, foreclosures for homes worth $5 million or more are up 61% this year despite the fact that overall foreclosures are down 23%. The question is, does this merely represent holdouts from the prior housing bubble, or is it a sign of things to come? Only time will tell. From CBS:

Foreclosures in the ultra-high-end housing market — homes worth $5 million or more — have skyrocketed 61 percent over last year.

That growth bucks the trend: Overall foreclosures are down 23 percent, according to a new report from Irvine, Calif.-based real estate information site RealtyTrac.

Until lately, that is. “Recently, we’ve been hearing from agents that they’re starting to see the high-end properties go to foreclosure and there turned out to be some data to support this notion that high-end holdouts are finally moving through the foreclosure process,” he said.

It may be a sign that lenders are now financially stable enough to start moving on ultra-high-end delinquencies and take the substantial losses these multi-million dollar homes represent.

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The Carlyle Group’s Latest Investment…Trailer Parks

October 17, 2013 by Michael Krieger

Earlier this month, I highlighted the fact that the Carlyle Group was the latest in a series of “smart money” private equity firms to decide it was time to exit the suddenly extremely crowded “buy-to rent” residential real estate trade. At the time I noted that:

As it sells apartments, Carlyle is focusing investments in areas such as senior housing, self-storage units and manufactured homes, where demand tends to be driven by life changes such as retirement or marriages, and isn’t so closely tied to changes in employment and gross domestic product, Stuckey said.

Well it appears Carlyle has already started to make its move. As the Wall Street Journal reported on Tuesday: Carlyle Jumps Into Niche Space – Private-Equity Firm Adds Trailer Parks to Its Diverse Portfolio. In case you can’t figure out what appears to be the key logic behind the shift in focus, try this line on for size:

Because the cost of relocating a home is expensive, residents are less likely to move away. “Our customers have no alternative shot at homeownership, nor do they [normally] even have the credit scores and quality to seek anything better,” Mr. Rolfe said. “They never leave the park they are in, and the revenues are unbelievably stable as a result.”

In neo-feudalistic America, always, always go long serfdom.

The Carlyle Group is the Latest “Smart Money” Investor to Ditch the Buy-to-Rent Trade

October 2, 2013 by Michael Krieger

At first, the rise in residential real estate prices across the U.S. was hard to explain. The economy remained in the dumps, while college kids were saddled with debts and poor paying jobs. A large portion of the demographic that typically enters the first home market was simply put, not in the market. Pretty soon it became obvious what was happening. Insider types and “smart money” was simply buying up every property they could find in order to turn around and rent them to the average citizen who had just been priced out of the market due their all cash bids. Add to this tens of billions of dollars in foreign laundered money and voilà, a new housing bubble was born.

However, as more and more lemmings began to chase the trade, initial investors have started to get nervous. First it was Och Ziff, then OakTree, then Carrington and finally now perhaps the most infamous of all insider private equity firms, the Carlyle Group. So now we have four well known and respected investors actively and publicly trying to exit the trade. As usual, they are selling to suckers such as life-insurance companies and real estate investment trusts.

From Bloomberg:

Carlyle Group LP (CG), the private-equity firm with more than a third of its $2.3 billion U.S. real estate fund in apartments, is reducing holdings of multifamily housing as rent growth slows from a post-recession surge.

Apartment-rent growth is slowing as the U.S. homebuying market rebounds and a wave of multifamily building adds to supply. In the third quarter, tenants on average paid 3 percent more than a year earlier after landlord concessions, down from 3.9 percent annual growth in effective rents in 2012, research firm Reis Inc. (REIS) said in a report today.

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Stage Two of the Housing Bubble Begins: Blackstone to Lend to Others for “Buy to Rent”

July 8, 2013 by Michael Krieger

As we all know, any good ponzi scheme needs a continued stream of new investors in order to keep it going otherwise the whole thing falls apart. We also know that the current rebound in the U.S. housing market is a centrally planned monster, led by private equity firms with access to cheap money and laundered foreign capital flooding into depressed markets, crowding out American families looking to purchase a home. Well now that Blackstone has spent more than $5 billion in its “buy-to-rent” scheme, it wants others to be able to “participate” in this wonderful investment opportunity (after them of course). Oh and by the way, one of the most common ads on the local radio here in Boulder as of late explains to people how they too can “get in” on the buy-to-rent trade. Best of luck. From Bloomberg:

Blackstone Group LP, the private-equity firm that has spent $5 billion on more than 30,000 distressed houses, is preparing to expand its bet on the housing recovery by lending to other landlords.

The firm, which already owns more rental homes than any other investor, has set up B2R Finance LP to offer loans starting at $10 million, according to four people who reviewed the terms. B2R is reaching out to landlords with portfolios of properties seeking to grow in the burgeoning industry for single-family homes to rent, said the people, who asked not to be identified because the discussions are private.

At least five rental companies have received non-binding term sheets from B2R, according to the people. Jeffrey Tennyson, the former chief executive officer of mortgage originator EquiFirst Corp., is running the firm, which stands for buy-to-rent. He previously led EquiFirst to become the 12th-largest wholesale subprime lender in the U.S. by 2007, when Barclays Bank PLC bought it. The London-based bank closed the business two years later after the market collapsed.

Tennyson didn’t return phone messages seeking comment on his role at B2R. Peter Rose, a spokesman for Blackstone, declined to comment.

So basically we continue to recycle the same characters from the last housing bubble to come on in and do it again.

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