I wasn't a believer in the efficacy of "sheer willpower" in a deal-making context, but I may well be prone to alter my skepticism after watching the close of the Intelsat transaction last week- a deal which seemed teetering on the brink of failure on an almost daily basis. Of course, deals with this kind of debt load (it floats at around 9.3x EBITDA) generally only get done when the underwriting banks feel they can easily lay off the debt to the public (or a set of Qualified Institutional Buyers ("QIB"'s) willing to endure the highs and lows of holding buyout debt bought though a Rule 144a sale. As an aside, the rise of Rule 144a exchanges has been quite a boon for liquidity with respect to these sorts of debt instruments and, I suspect, has softened the blow to debt markets quite a bit).
In this case, however, the banks didn't even bother going to the street. Bank of America, Credit Suisse and Morgan Stanley underwrite nearly $5 billion in new debt in the transaction, less than half of the $11 billion of debt that now burdens the weary shoulders of Intelsat. Interestingly, the old debt holders were, somehow, lured into hanging on to their existing debt to reduce the amount the underwriters would have to float (and burden some debt market or another with) to close the deal.
The Wall Street Journal points out that Clear Channel Communications and BCE are queued up to saturate the debt market with their paper before long, so it's probably more than minor coup that Intelsat's underwriters aren't headed to the street with more than $10 billion in debt to place. The less than pleasant, but highly entertaining Harrah's debt issue has already pushed the saturation limits, which makes one wonder how long those underwriters will have to hold the debt on their own books. Maybe quite a while.
Some rather uncivilized behaviors by certain banks (ahem, Credit Suisse) that have gone to market with their share of Harrah's debt before the schedule agreed upon by their fellow underwriters (very bad form, that) will cause the always astute Going Private reader to draw many conclusions about the "desperation quotient" these kind of balance sheet lodestones can create. This event also generates my favorite debt-related quote of the year so far from a Credit Suisse banker on the subject of front-running their underwriting colleagues:
"There is no contractual obligation. We cannot concede control over our own capital."
This is interesting as, at least by the numbers, Harrah's is one of the better looking of the large LBOs right now. $6 billion of equity has kept its debt:equity ratio comparatively low.
This is boring news compared to the sort of antics to be seen over at Clear Channel. It doesn't take deep psychological analysis to read the internal memo from John Hogan back in January as originating from something resembling panic. To wit:
From: Hogan, John
Sent: Friday, January 25, 2008 09:31
To: Radio General Managers - All; Radio Business Managers
Cc: Radio EVP's; Radio SVP's ; Radio SVPP; Radio RVP
Subject: First Quarter Contingency Plan
Good Morning,
As you are undoubtedly aware, we are generating less revenue for Q1 than we budgeted and less than what actually ran last year. At the same time, our budgeted expenses for Q1 are up 4%. While there are a number of factors contributing to our revenue shortfall the fact is we are behind on our revenue plan, up over last year on expenses, and as a result we will be well below our budgeted Q1 bcf. As responsible managers, we need to address the shortfall not only by continuing to find ways to increase our revenue but also by implementing cuts on the expense side until revenue production improves.
[...]
The following Q1 expense reductions are to be implemented immediately in your market and correctly reflected to San Antonio by having your Market Controller access the Flash website under Reporting Events and complete the form titled "Q1 Contingency Plan"
[...]
-any/all discretionary monies (i.e. travel, meals and entertainment, etc) for your market. If you can save it, do so.
[...]
I completely understand the challenges associated with implementing the above cuts. It will make your job more difficult and have some long term affect (sic) on your overall performance. It goes without saying that leading through these reductions will be challenging. If there were another better alternative, we would not be requiring these reductions be implemented. Unfortunately, there is not another alternative.
Impact on share price once the memo got out (instantly, of course) should be predictable. (Spoiler below).
Still, add to the distress the fact that the bottleneck in loan markets is quite severe, and the picture looks dim indeed for banks holding CCC and BCE debt with the hopes of unloading it. Standard and Poor's points out that something like $150 billion in unsyndicated debt sits on the books of various banks, the vast majority of it LBO related. $0.90 on the dollar is a gift for many of these instruments at this point.
It resembles the sort of thing we started to see back in January. Or as the Journal put it more specifically:
With the prices of existing loans tumbling, investors have little incentive to buy new loans unless they are sold at steep discounts, something banks are reluctant to do.
The result: More assets building up on bank balance sheets, growing tensions among rival bankers who had grown accustomed during the buyout boom to cooperating with each other and a deepening crisis in the market for buyout debt.
The crisis started last summer, when investors turned up their noses at billions of dollars in buyout debt, just after many buyout firms and their bankers made commitments to history-making megadeals. Many investors say January was the worst performance for this market since those summer months.
And this is why it is difficult not to let out a low whistle when reading about the Intelsat deal. And that's before you do any sort of IRR calculation on the figures, which, after a January, 2005 investment of $128 million by Madison Dearborn (with Apax, Apollo, and Permira as co-investors) pulled down $1.2 billion or so for Mad Dear with the purchase of Intelsat by BC Partners, Silver Lake and others for $5 billion. Add to this about $163 million in various other fees (management fees, probably) and you have a tidy sum. Assuming those management fees were paid yearly or thereabouts and in equal measure (and this is probably wrong as a large chunk of the fees were likely for "early termination" of the management contract itself, as it's hard to imagine they predicted a liquidity event so soon) and you get figures that look about like this:
Yum.
