7/29/07

You don't have to be a higher mammal to read body language. The bunny is on the defensive.

Long has lagomorphic logic held that the rampant buying binge stemming from cheap money would create a cascade effect, blowing a hole in the bubble of debt-financed speculative acquisitions. This weekend's Wall Street Journal is awash in tales of carnage, though in the bunny's opinion, the New York Times had the best headline (and photo) on 7/27 : "Easy Credit Evaporates, and So Does the Market's Buyout Frenzy" by Sorkin and de la Merced.

CDOs, CLOs, LBOs, IPOs used to finance LBOs--the bunny could never digest this torrent of alphabet soup served up daily by the media. (His kind saw the benefits of a high-fiber diet not long after the last of the dinosaurs went belly-up.) He had been laying low for past few weeks, reading under his fan while the rest of the higher orders sweated out the heat and humidity (you would probably do likewise if you had a fur coat you could never take off).

One thing that has made the bunny's ears stand at acute angles recently was KKR's feeding frenzy. (Try to imagine an amoeba with a swagger.) Of particular jaw-grinding interest was the firm's tooth-gnashing buyout attempt for credit card processor First Data, a deal valued variously at $26 or $29 billion (depending on who covered the story), which stirred up a spat with backer Chase JP Morgan (see Michael Flaherty's Reuters piece from 4/26, "First Data Deal Sparks Spat Between KKR, JPMorgan"). While the tiff centered on the fate of a Chase/First Data joint venture, it was the nature of the deal that set the bunny's mighty mandibles on edge. KKR (which had filed for a $1.25 billion IPO to raise additional cash, according to a Bloomberg story posted 7/16 by Richard Evans and Elizabeth Hester ("KKR to Raise $1.25 Billion in IPO After Blackstone [update 2]), and which is now an object of gloomy don't-think-so speculation, according to the aforementioned Times article by Sorkin & Merced from 7/27, not to mention a piece from Wall Street Journal Europe by Dwight Cass, Nicole Lee, Simon Nixon and Fiona Maharg-Bravo on 6/27) had set out to raise $14 billion in financing for an already agreed-upon deal in so-called "covenant-lite" loans (not to mention another $8 billion in junk bonds), which, according to Dana Cimilluca in the WSJ on 7/9 (p.C1), "don't require borrowers to live up to certain performance metrics for cash flow or profits." Ms. C went on to note that the mechanics of the deal would load up First Data with debt equivalent to ten times its cash flow, which caused the bunny to eviscerate the entire issue with tooth and claw. No wonder Chase was upset--as one of the primary backers of the deal, it would be stuck holding the bag if the credit market soured--just as it seems to be doing. This while KKR has been trying to acquire British retailers Sainsbury and Alliance Boots, Dollar General, and, of course, TXU. (See also "An Assessment of KKR's First Data Bet" in NYT Dealbook edited by Andrew Ross Sorkin 7/10; "Covenant 'Lite' Ranks Swelling in Loan Market" in WSJ's LBO Wire by Cynthia Koons 7/18; and "Buyout Produces Record Cov-Lite Loan" by Dan Andrews in the International Financial Law Review.)

The bunny could just spit, if only he had the glands.

The long period of historically low interest rates has unleashed a torrent of cheap money, which always brings trouble. Look no further than the blowup of two Bear Stearns funds (A-rated by the usual three agencies) that in a matter of one week's time became totally and admittedly worthless. In this case it has led to an orgy of strip 'n flip acquisitions by private equity firms and hedge funds, built largely on credit structures derived from high-risk loans of all stripes. When the house of cards falls, as it inevitably does, as it did and is still doing at Bear Stearns, the vibrations, like those of an earthquake, radiate outward in all directions. This week's bloodbath on Wall Street should not have surprised anyone watching the bloated buyout backlog of recent months. (Though the the bunny counsels that the impulse to panic is overdone. After all, a garden variety stock market correction is historically ten percent, which from a high of 14,oo0 would mean the Dow would come to rest at 12,600--and this would be par for the course.)

Long has the bunny bemoaned the evils of cheap money, high-risk loans, lightly regulated investor pools, and junk paper. Look down, look DOWN that junk road, greedy bipeds, warns the bunny (sounding incongruously like William Burroughs trying to cop on Wall Street). Buying on borrowed money (borrowed from careless lenders) carries an inevitable payoff that no one wants to face, but that everyone eventually will.