Goldman, Lehman Slash Prices to Unload Backlog in Buyout Debt
By Pierre Paulden
March 19 (Bloomberg) — Goldman Sachs Group Inc. is selling
Chrysler LLC debt for less than 80 cents on the dollar as Wall
Street firms cut their backlog of high-risk, high-yield loans and
bonds promised to leveraged buyout firms.
Goldman, Lehman Brothers Holdings Inc. and Morgan Stanley
are among securities firms and banks holding $129 billion of LBO
loans, down from $163 billion at the start of this year,
according to Bank of America Corp. analysts led by Jeffrey
Rosenberg. The firms also have $73.6 billion of high-yield bonds
they need to sell, the analysts said.
Some of the same LBO firms that generated the debt in the
first place are raising funds to buy it back at reduced prices.
Blackstone Group raised a $1.4 billion fund last November to buy
bank loans, and Leon Blacks Apollo Management LP has bought $1
billion of distressed loans and bonds.
“The leveraged loan forward calendar continues to
decline, Rosenberg wrote in the report on March 17. “The
ongoing raising of distressed debt funds, including Apollos,
“appears to support these efforts.
The buyout industry, including Blackstone, Apollo and
Kohlberg, Kravis Roberts %26amp; Co., all based in New York, negotiated
more than $370 billion in debt packages to back acquisitions such
as the $32 billion purchase of Texas power producer TXU Corp. and
the $46.8 billion sale of Canadian telecommunications company BCE
Inc. to an investor group led by the Ontario Teachers Pension
Plan, the largest buyout ever.
Plunging Demand
Investor demand for the debt plummeted in July as contagion
from losses on U.S. subprime securities spread to other asset
classes. The average price of a leveraged loan fell from par to a
record low of 86.28 last month, according to Standard %26amp; Poors
data. Prices have since climbed to 87.32 cents on the dollar.
Banks began tackling the backlog in September, when lenders
for KKR sold $9.4 billion of loans at a discount of up to 4
percent for its takeover of Greenwood Village, Colorado-based
First Data Corp., the biggest processor of credit card payments.
Cerberus Capital Management LP bought Chrysler last August.
Bankers for the Auburn Hills, Michigan-based automaker twice
failed to sell the Chrysler loans. JPMorgan Chase %26amp; Co.,
Citigroup, Morgan Stanley, Bear Stearns Cos. and Goldman, all of
New York, tried in November to sell $4 billion of the loans at
97.5 cents on the dollar.
The loan is priced at 400 basis points more than the three-
month London interbank offered rate, a borrowing benchmark.
Three-month Libor is 2.6 percent. A basis point is 0.01
percentage point.
Harrahs Debt
In January, lenders including New York-based Citigroup,
Charlotte, North Carolina-based Bank of America and Deutsche Bank
AG of Frankfurt struggled to sell $7.25 billion of loans to Las
Vegas-based casino operator Harrahs Entertainment Inc. for 96.5
cents on the dollar.
Banks are trying to sell their portions of the debt outside
of the traditional syndicate, Rosenberg wrote.
In syndicated loans, banks form a financing group. One or
two institutions typically take charge of finding buyers for
chunks of the loans, such as other banks, money managers and
hedge funds, at an agreed-upon price. If the banks cannot sell
the loans during an agreed-upon period, typically 60 to 90 days,
the banks can then sell their portions individually.
Goldman, the worlds biggest securities firm by market
value, is selling its approximately 20 percent portion of
Chryslers $7 billion in loans for as little as 72 cents on the
dollar, said investors, who declined to be identified because the
terms are private. Goldman spokesman Michael DuVally declined to
comment on individual sales.
Reduced Backlog
Goldman reduced its backlog of loans by $20 billion in the
past quarter from $43 billion, chief financial officer David
Viniar said on an investor call yesterday. The New-York based
firm, which booked a loss of $1 billion on the loans, also added
$4 billion of new commitments during the period.
Lehman booked losses of $500 million on leveraged loans last
quarter, reducing its buyout debt backlog by $6.1 billion to
$17.8 billion since year-end, CFO Erin Callan said on a
conference call with investors yesterday. Lehman, the fourth-
biggest U.S. securities firm, is based in New York.
Morgan Stanley, the second-biggest U.S. securities firm,
reduced its leveraged finance pipeline from $20 billion to $16
billion during the first quarter, CFO Colm Kelleher said in an
interview today after reporting that first quarter earnings fell
42 percent.
In addition to the buyout firms, traditional loan investors
and hedge funds are also buying the debt.
Dallas-based Highland Capital Management has raised $1
billion in the past four months from pension funds and sovereign
wealth funds, to invest in debt, including bank loans, according
to Mark Okada, co-founder and chief investment officer.
“We are more willing to participate in new issues at these
distressed prices, said Scott DOrsi, a partner at Boston-based
Feingold OKeeffe Capital, which has $1.25 billion in assets.
“Its been a waiting game between the buy side and the banks
over the past several months, with pricing moving in favor of
investors.
To contact the reporter on this story:
Pierre Paulden in New York at
ppaulden@bloomberg.net;
