Thursday, May 17, 2007

LBO notes

First of all, I told you we'd hit 4.75% on the 10yr.

Now, some notes on three recent LBO/LBO rumors...

DaimlerChrysler: Basically Daimler will be paying Cerberus around $1 billion to take on Chrysler's legacy costs. Daimler is legally bound to guarantee all of Chrysler's debt (even post transaction), and the prevailing thought is that most of Chrysler/DaimlerChrysler bonds will be retired through a make-whole call. It may be that some short bonds are simply allowed to mature.

Even if Daimler leaves some DCX bonds outstanding, the thought is that the new Daimler will earn a ratings upgrade into the middle/high A range. Anyway, DCX bonds are gapping tighter. Kudos if you own their old 100-year bond. Your return on that puppy is going to look like an old dot com from the 90's.

The Wall Street Journal reported today that the new Chrysler will need to sell $68 billion in new debt, but if I'm reading the situation right, that could be almost all high-rated ABS. So the amount of debt on Chrysler's books post transaction could be quite low indeed. Its a nifty twist on the classic LBO model. Instead of creating new liabilities (by levering up) and paying the old owners a hefty sum for their company, Cerberus is actually getting cash in exchange for taking on existing liabilities. The economics aren't that different, but its interesting nonetheless.

Sallie Mae: The political risk surrounding SLM Corp is rising by the day. Senate Democrats are looking to cut the subsidy to student loans by as much as $22 billion. According to many, the SLM deal allows JC Flowers et al to withdraw their bid if the subsidy is cut by more than $16 billion.

I had pegged the political risk relating to this deal as low when it was originally announced. I really thought hopes for a political roadblock to this deal was wishful thinking on the part of bond holders. But it looks like the "affordable college" issue plus the burgeoning kickback scandal in the student loan industry has ramped up the political risk here. The market seems to be giving the possibility of this deal falling appart at least some weight. SLM bonds have been slowing rising in value for the last 5-6 trading sessions.

I'm still not convinced that SLM winds up with a junk rating, at least not right away. I think the odds of a BBB/Baa rating has to be at least 30% or so. I've made this argument before, if you are interested...

Alltel: Yesterday Kevin Beebe, president of operations, canceled Alltel's presentation at a Morgan Stanley conference. This kind of thing always leads to speculation that a deal is imminent, although the same thing happened last month, where I believe Scott Ford was to present at a Prudential conference.

Meanwhile, Scott Ford refused to comment on the "strategic review" (translation, how the hell are we going to sell this thing?) during Alltel's earnings call on 5/15. Gimmie Credit, an independent credit research firm, thinks a buyout by Verizon makes more economic sense than a LBO.

I've said for a long time that I didn't think a LBO was the best route for Alltel. I think the wild card is that Alltel knows it has to sell itself no matter what. If no strategic buyer emerges, there will be a LBO. I just think that a private equity firm would only buy if the price gets a little lower, and if the price gets lower, wouldn't that entice a strategic buyer? Probably.

Disclosure: I own lots of stuff, and I buy stuff and sell stuff all the time. Maybe I'm trying to trick you into buying my stuff by posting about it! In fact, that's exactly what I'm doing, so stop reading right now and call your mother. She misses you.

11 comments:

Anonymous said...

Great site, any other blogs/websites you would recommend for bonds, corporate paper in particular?

Anonymous said...

Well, it looks like it is TPG/Goldman acquiring Alltel.....

BackOfficeMonkey said...

Hello,

Nice blog, I can't think of any other investments blogs dealing with fixed income so your blog have been refreshing.

Good posts on CDOs, I use to work in the back office on trade settlement, accounting, etc. for a few CDOs and I never really quite understood the purpose until now. LOL!

Anyways, I want to break into fixed income side of investment management and do you have any tips for a fixed income newbie? How did you start your career in fixed income?

-BOM

TDDG said...

Backoffice:

I don't know of any other blogs like mine. Which is why I started it.

As for breaking in... do whatever you can to get into doing real fixed income analysis. One good way to get there is to find a smaller firm, where you are more likely to get the chance to do a little of everything. Of course, its tough because smaller firms aren't always hiring. If you want to e-mail me any firms you are thinking of interviewing with, I can let you know what I know about them.

Anonymous said...

Hi TDDG- is there an email address I can reach you at? I have a question about Chrysler's bonds...
thanks!

TDDG said...

accruedint *at* gmail.com

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...
This comment has been removed by a blog administrator.
Yaser Anwar said...

Looking at AT from a purely risk to reward perspective tells one to not go long this stock. Currently at 68 with 3.5 to the upside and 10 to the downside (pre-merger announcement). However, given the overwhelming response by shareholders and the process of TPG and GSCP tells one deal is likely to go through as forecasted by year end.

TDDG said...

The stock has improved a good bit over the last several sessions. I'm not a big fan of merger arbitrage for the reasons you state. There is usually like 7% upwide and 30% downside.

sunshine said...

Now do you worried about that in the game do not had enough aion kina to play the game, now you can not worried, my friend told me a website, in here you can buy a lot aion online kina and only spend a little money, do not hesitate, it was really, in here we had much aion gold, we can sure that you will get the cheap aion kina, quick to come here to buy aion kina.

Now do you worried about that in the game do not had enough Anarchy credits to play the game, now you can not worried, my friend told me a website, in here you can buy a lot Anarchy Online credits and only spend a little money, do not hesitate, it was really, in here we had much Anarchy gold, we can sure that you will get the Anarchy online gold, quick to come here to buy AO credits.