PE heads still see trouble ahead for debt markets (Dealscape)

Wednesday, November 19,

8:43 am

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PE heads still see trouble ahead for debt markets

[Posted on May 13, 2008 at 9:05 AM]

Two of the best known names in private equity -- Terra Firma's Guy Hands and the Carlyle Group's David Rubinstein -- have taken a dim view of the state of the debt markets and banks in recent days.

According to Bloomberg Guy Hands, the head of Terra Firma Capital Partners Ltd., turned down offers from banks to buy LBO debt because he felt that firms purchasing the loans risked repeating the mistakes of investors in subprime mortgages. The news service writes:

"What the private equity firms are doing is what the hedge funds were doing when they were buying the subprime mortgages," Hands said. "They were effectively putting up a small amount of equity and hoping the amount they would receive back in positive spread would pay off that equity before the market went down."

On the same day, David Rubenstein, the chairman of Carlyle Group, said that U.S. and European banks still face "enormous losses" from bad loans they haven't yet recognized.

Bloomberg reports:

"Based on information I see," it will take at least a year before all losses are realized, and some financial institutions may fail, Rubenstein said at a breakfast meeting of the Institute for Education Public Policy Roundtable in Washington. "The sovereign wealth funds are not likely to jump into the fray again to bail out these institutions. Many financial institutions aren't going to be able to survive as independent institutions.

Sovereign wealth funds have already swallowed $25 billion in losses from their investments in banks and securities firms, while financial institutions have recorded $329.2 billion in credit losses and write-downs and raised $246.6 billion in capital since the beginning of 2007, according to Bloomberg's statistics. Dire straits for the banks combined with private equity firms sitting on billions in capital could easily spell buying opportunities for the buyout shops.

The Deal's Vipal Monga writes that

private equity firms now have a golden opportunity to invest in the financial sector as a whole, including banks. As Keefe, Bruyette & Woods Inc. analyst Melissa Roberts estimated in an April 18 research report, about 42 U.S. financial institutions may require capital infusions this year, including regional banks, real estate investment trusts and mortgage insurers. And private equity funds, their coffers stuffed with billions of idle dollars waiting to be invested in buyouts, are eager to provide it.

The state of the leveraged finance markets will be front and center at The Deal's Fifth Annual Private Capital Symposium on Wednesday. A panel will examine the landscape for financing; how will lenders remain competitive; and who are the beneficiaries of the credit crunch. Panelists include John Eydenberg, head of leveraged finance at Deutsche Bank Securities; Alan Jones, co-head of global private equity at Morgan Stanley; Mathew Lori, a managing director at New Mountain Capital; Peter M. Schoenfeld, chairman and CEO of P. Schoenfeld Asset Management LLC; and Michael Zupon, a managing director at the Carlyle Group. - George White

See Bloomberg story on Guy Hands
See Bloomberg story on Rubinstein
See story on banks and PE on TheDeal.com
See more on the Private Capital Symposium

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