Mail Malice

A loyal reader and occasional critic writes of my link to interest rate discussions yesterday "penned" by Harris Rubinroit.  Apparently it is reader mail week here at Going Private.  Said reader is annoyed with Rubinroit, and me.  To wit:

Your recent post on the Bloomberg article discussing high yield financing that you described as a "tour de force". In the sense that he managed to copy most of a recent S&P article without making a mistake it was indeed a "tour de force". As an exercise in original thought or insightful analysis it was somewhat lacking. Mr Rubinroit appears to have written the article based entirely on secondary sources (such as the S&P article) without much in the way of primary sources or significant input anyone with any connection to the thrilling world of leveraged finance (the quotes from various sources notwithstanding). Amongst the points I would raise with the author would be:

(a) the cost of the HCA senior financing is likely to be significantly higher than L+215bps; I would suggest a figure closer to L+275-300bps. Its just difficult to place $8bn (or whatever the number might turn out to be) of bank debt without offering some premium to the market standard for LBO financing (which is somewhere around L+250 I suspect). Ask your colleague the debt bitch if you don't believe me.

(Note: The Debt Bitch agrees fully, and calls Rubinroit's assertion "Muffielike" in what I can only assume is a reference to Muffie Benson-Perella).

(b) The main reason that borrowing costs for HCA will be higher is because LIBOR is higher, rather than because spreads are higher. LIBOR is higher because US interest rates are higher. As the debt is floating rate, whether the deal was done in April or closes next year, they would have taken a hit from this (leaving aside the impact of any hedges that the company may have put in place) at the next reset date - generally every 3 months.

This was the one part of Rubinroit's argument that I still find compelling.  If the LIBOR spread is 275 basis points it is clearly more expensive than a LIBOR spread of 225 basis points no matter which direction (if any) interest rates are headed.  Of course, Rubinroit's credibility on LIBOR spreads seems awfully questionable now that my astute reader has chimed in. For what it's worth, the Debt Bitch does think spreads for LBOs were quite narrow back in "the spring."  She also sighed a wistful sigh and looked a heartbreakingly wistful and nostolgic look when remembering "those days."

(c) investors in leveraged loans generally are not as picky as the article portrays them to be - many can't afford to be. The CLOs mentioned in the article are heavily incentivised to remain close to 100% invested - they are very levered (c. 9x) investment pools and if they sit holding cash will suffer from significant negative carry, crushing equity returns (and more importantly for the managers, performance fees) and are forced to hold highly diversified portfolios (generally 50+ different borrowers). Finding 50+ high quality sub-investment grade companies can be something of a struggle particularly for 3rd tier and new managers that aren't close to the sell-side and so bad companies continue to get financed and will continue to do so until some of these CLOs start to crack (which will happen as default rates increase).

This is a critical piece of analysis which I (and Rubinroit) entirely neglected.  Shame on me for not pouncing, as I have fretted before about the wholesale sale of LBO debt in the context of covenant lite loans- in particular because the current practice as implemented seems to have more to do with "placing" funds than investing them.

I could go on but I won't suffice to say the article may have summed up a lot that is already well known but didn't provide any insight whatsoever.

However, my issue is not with Mr Rubinroit's article per se, but rather how you presented it: you basically took a summary of recent industry analyses and 2 minute conversations with industry "experts" and summarized it further. No insightful analysis. No commentary or opinion. No witty lampoonery. Not even a sarcastic swipe. This is not what brings readers to your blog. I daresay the bulk have access to Bloomberg or would have seen the article (or one like it) floating around. While you have made your views on debt financing clear in previous posts you really didn't elucidate on them here. What I'm trying to say is I'd much rather have your views on the subject that a summary of S&P stats (lies, damn lies and statistics and all that). I might not always agree with them (I'm one of those nice young men running LBO financing at a hedge fund that you often make (somewhat dismissive) passing comments about), but I'm generally interested in and amused by them, as I think the bulk of your readership are (all 4 other readers would no doubt back me up.....).

I was having an off day, that’s for sure.  Sorry.  But I'll have you know that I have 6 readers now (including me).