U.S. bank indices fell 2% yesterday after fears that capital requirements would increase as much as 7%. Bank of America (NYSE: BAC), fell below $11.00, the lowest since last year. The discussion came about after the Basel Committee on Banking revealed how levered large financial institutions still were, and tried to reconcile levels with future recession risks. A 7% equity capital raise for most banks would be catastrophic and dilute equity by 50%+, but a 3% raise seems manageable in a functioning economy. The problem is that the U.S. economy is on life support, and that life support is called Quantitative Easing 2. Once this support fades on June 30th, how will U.S. banks (at their already low valuations due to real estate risk and put backs) raise new equity capital? A replay of 2009? You be the judge.
According to Bloomberg, “The Fed supports a proposal at the Basel Committee on Banking Supervision that calls for a maximum capital surcharge of three percentage points on the largest global banks, according to a person familiar with the discussions.
International central bankers and supervisors meeting in Basel, Switzerland, have decided that banks need to hold more capital to avoid future taxpayer-funded bailouts. Financial stock indexes fell in Europe and the U.S. yesterday as traders interpreted June 3 remarks by Fed Governor Daniel Tarullo as leaving the door open to surcharges of as much as seven percentage points.
“A seven percentage-point surcharge for the largest banks would be a disaster,” said a senior analyst at Barclays Capital Inc. in NY. “It will certainly restrict lending and curb economic growth if true.”
Basel regulators agreed last year to raise the minimum common equity requirement for banks to 4.5 percent from 2 percent, with an added buffer of 2.5 percent for a total of 7 percent of assets weighted for risk.
Basel members are also proposing that so-called global systemically important financial institutions, or global SIFIs, hold an additional capital buffer equivalent to as much as three percentage points, a stance Fed officials haven’t opposed, the person said.
Bank Indexes Fall
The Bloomberg Europe Banks and Financial Services Index fell 1.45 percent yesterday, while the Standard & Poor’s 500 Index declined 1.1 percent. The KBW Bank Index, which tracks shares of Citigroup Inc., Bank of America Corp., Wells Fargo. and 21 other companies, fell 2.1 percent.
In a June 3 speech, Tarullo presented a theoretical calculation with the global SIFI buffer as high as seven percentage points.
“The enhanced capital requirement implied by this methodology can range between about 20% to more than 100% over the Basel III requirements, depending on choices made among plausible assumptions,” he said in the text of his remarks at the Peter G. Peterson Institute for International Economics in Washington.
In a question-and-answer period with C. Fred Bergsten, the Peterson Institute’s director, Tarullo agreed that the capital requirement, with the global SIFI buffer, could be 8.5 percent to 14 percent under this scenario. A common equity requirement of 10 percent is closer to what investors are assuming.
‘Across the Board’
“I think 3 percent is where everyone expected it to come out,” Simon Gleeson a financial services lawyer at Clifford Chance LLP, said in a telephone interview. “If it is 3 percent across the board then it will be interesting to see what happens to the smallest SIFI and the largest non-SIFI” on a competitive basis, he said.
U.S. Treasury Secretary Geithner, in remarks yesterday before the International Monetary Conference in Atlanta, said there is a “strong case” for a surcharge on the largest banks. Fed Chairman Bernanke is scheduled to discuss the U.S. economic outlook at the conference today.
“In the US, we will require the largest U.S. firms to hold an additional surcharge of common equity,” Geithner said. “We believe that a simple common equity surcharge should be applied internationally.”
Financial industry executives are concerned that rising capital requirements will hurt the economy, which is already struggling with an unemployment rate stuck at around 9 percent.
Higher capital charges “will have ramifications on what people pay for credit, what banks hold on balance sheets,” JPMorgan Chase & Co. chairman and chief executive officer Jamie Dimon told investors at a June 2 Sanford C. Bernstein & Co. conference in New York.
The Global Financial Markets Association, a trade group whose board includes executives from GS and Morgan Stanley, said the surcharge may apply to 15 to 26 global banks, according to a May 25 memo sent to board members by chief executive officer Tim Ryan.
Dino Kos, managing director at New York research firm Hamiltonian Associates, said the discussion about new capital requirements comes at a time when banks face stiff headwinds. Credit demand is weak, and non-interest income from fees and trading is also under pressure.
U.S. banks reported net income of $29 billion in the first quarter, the best result since the second quarter of 2007, before subprime mortgage defaults began to spread through the global financial system, according to the Federal Deposit Insurance Corp.’s Quarterly Banking Profile.
Still, the higher profits resulted from lower loan-loss provisions, the FDIC said. Net operating revenue fell 3.2 percent from a year earlier, only the second time in 27 years of data the industry reported a year-over-year decline in quarterly net operating revenue, the FDIC said.
“You can see why banks are howling,” said Kos, former executive vice president at the New York Fed. Higher capital charges come on top of proposals to tighten liquidity rules and limit interchange fees, while the “Volcker Rule” restricts trading activities. Taken together these imply lower returns on equity, he said.
“How can you justify current compensation levels if returns on equity are much lower than in the past?” Kos said.
Investment bank earnings estimates are truly bullish for 2011. Applying a 16x-18x multiple to these forward earnings brings you to S&P levels unseen since 2007. Unfortunately, something not included in these estimates is that for every $10 crude oil increases, S&P earnings fall by $3. This does not even factor in the fall in consumer confidence when citizens across the globe realize that they are soon going to pay $200 to fill up a mid-sized sedan, once QE3 is unveiled and Middle Eastern governments are overthrown once and for all. After all this is done for, oil could easily reach $130+ on a supply disruption in Saudi Arabia.
Of course, BofA’s Bianco will not discuss this. Neither will the analysts at Barclays, who just revised their S&P 500 earnings estimates up from 1,420 to 1,450.
Please view LA’s blog entry to see the S&P earning’s table below.
March 2, 2011: Tepper, the legendary founder of Appaloosa, the man who bought BAC at $3.00 and made $4 billion last year just outdid himself. One of Tepper’s biggest positions is Bank of America, and he just hired their head of mergers & acquisitions, Jeff Kaplan (we can only hope that their is no insider information exchanged, so that Tepper can stay in business). I lost some faith in the HF industry when Shumway and Level Global closed over the past two weeks. BAC has its hands tied, as the firm’s only bidder in the depths of the recession now seems to be its enemy…nice knowing ya Mr. Kaplan. The Bernanke put has made Tepper exceedingly jolly and audacious, as one can see clearly in the photograph above.
Bank of America Corp., the biggest U.S. lender by assets, said Steven Baronoff will assume Jeff Kaplan’s duties leading mergers and acquisitions.
Kaplan is leaving to join hedge fund Appaloosa Management LP, the Charlotte, North Carolina-based bank said today in a memo obtained by Bloomberg. Baronoff, chairman of global M&A, has advised on more than $1 trillion of transactions, including Procter & Gamble Co.’s purchase of Gillette, according to the memo from Thomas Montag, president of global banking and markets, and Michael Rubinoff and Purna Saggurti, co-heads of global investment banking.
Baronoff “will continue to serve as our most senior adviser to deal teams and clients globally,” according to the memo. “We thank Jeff for his dedication and leadership and look forward to working with him in the future.”
Kaplan joins Appaloosa, a Bank of America client, as chief operating officer, according to the memo. As M&A chief, he worked on deals including advising Marvel Entertainment Inc., led by Isaac Perlmutter, on its $4 billion sale to Walt Disney Co. in 2009.
John Yiannacopoulos, a Bank of America spokesman, confirmed the contents of the memo. The change was reported earlier by the Wall Street Journal.
– With assistance from Zachary Mider in New York. Editors: Dan Reichl, David Scheer
To contact the reporters on this story: Hugh Son in New York at email@example.com; Dakin Campbell in San Francisco at firstname.lastname@example.org.
We thank Dan for his contribution to Leverage Academy, LLC and for writing this biography on David Tepper, of Appaloosa, who made $4 billion for himself last year.
David Tepper grew up in a middle class neighborhood in Pittsburgh, PA. He became interested in the stock market after observing his dad, an accountant, trade stocks during the day. Following high school, he enrolled in the University of Pittsburgh, where he excelled. After Tepper graduated with a degree in economics, he found a job with Equibank as a credit analyst. He quickly became bored with the role and enrolled in the MBA program at Carnegie Mellon’s School of Business, now named after him.  Tepper’s experience at Carnegie Mellon helped him learn options theory at a time when there were no textbooks written on the subject. Kenn Dunn, the Dean of school of the school himself taught these option courses.
After graduating, Tepper worked in the Treasury division at Republic Steel, once the third largest steel manufacturer in the U.S. Soon after, Tepper moved onto Keystone Mutual Funds, and finally to Goldman Sachs. At Goldman, Tepper focused on his original role as a credit analyst. However, six months later, he became the head trader on the high yield bond desk! Despite his successes, Tepper was not promoted to partner due to his disregard for office politics. After eight years at Goldman, he left and started Appaloosa Management in 1992 with Jack Walton, another Goldman Sachs trader.
With his background in bankruptcies and special situations at Goldman, Tepper applied his skills and experience at the new hedge fund, and it worked out tremendously for him. Tepper is categorized as a distressed debt investor, but he really analyzes and invests in the entire capital structure of distressed companies, from senior secured debt to sub-debt and post-bankruptcy equity. His fund has averaged a 30% average return since 1993! While that number is particularly high, Appaloosa has fairly volatile historical returns. In 2008, Tepper’s fund was down around 25% for the year. For the investor that stuck with him, this certainly paid off with a 120% return after fees in 2009.  Tepper shies away from the typical glitz and glamour of the ostentatious hedge fund industry. Appaloosa is not based in New York, but in a small office in Chatham, NJ. It is only about 15 minutes from his house so he can spend more time with his family. The firm manages around $12 billion.
Tepper’s astronomical returns resulted from huge bets on the banking industry, specifically Bank of America (BAC) and Citibank (C). He bought BAC around $3.72 and Citi near $0.79. At year’s end, BAC ended at $15.06, a 305% return, and Citi ended at $3.31, a 319% return. Appaloosa also has invested in other financial companies such as Wells Fargo (WFC), Suntrust (STI), and Royal Bank of Scotland (RBS). Other companies Tepper has investments in are Rite Aid (RAD) , Office Depot (ODP), Good Year Tire and Rubber (GT), OfficeMax (OMX), and Microsoft (MSFT). He believes that valuations on stocks and bonds in the financial industry remain favorable, and he is now investing in commercial real estate, a place where many analysts expect huge losses.
Tepper’s investment strategy involves finding value in these distressed companies and betting big. He is not very diversified in his holdings compared to most hedge funds. Investing in these distressed companies can be a very lonely business. David Tepper stated about his recent purchases of BAC and Citi, “I felt like I was alone. No one was even bidding.” While some don’t like being alone, Tepper’s contrarian approach helped him scoop up these companies at bargain prices. Tepper reminds himself that he needs a contrarian attitude every day when he walks into his office and sees a pair of brass balls on his desk, literally. “Mr. Tepper keeps a brass replica of a pair of testicles in a prominent spot on his desk, a present from former employees. He rubs the gift for luck during the trading day to get a laugh out of colleagues.” While humorous, these brass balls represent his strategy of taking concentrated bets on these companies that the market does not see any value in.
David Tepper has not been without controversy. In his dealings with Delphi, an auto parts maker, his hedge fund along with other investors backed out of their exit financing agreement after Delphi sought additional funding from General Motors. His hedge fund believed accepting money from an automaker would hurt Delphi’s ability to win contracts with other automakers. The hedge fund also claimed that this funding arrangement broke their financing agreement. Delphi, in turn sued, declaring that the issue was a “story of betrayal and mistrust.”  It has since gone into Chapter 11 reorganization.
While most hedge fund managers who have made $4 billion in a year during one of the worst recessions since the 1930s would face scrutiny from the press, public, and government, Tepper has largely gone unscathed due to the lack of glitz and glamour of his lifestyle. Tepper lives in a New Jersey suburb in the same house that he bought in the early 1990s and coaches his kids’ sports teams. He is a family man is proud of raising three good children. He says, “It was much easier when they were younger. It’s harder now when they open the paper and see how much money I make.”
Last year, Tepper told the business school magazine at Carnegie Mellon that money should be a secondary goal, while living an upstanding life and pursuing what you enjoy should be the top priority. Tepper does not forget about his roots either. He regularly goes to Pittsburgh to visit his alma mater and to watch the Pittsburgh Steelers (of which he is now a part owner). He also donates money to food pantries and other charities around Pittsburgh. Tepper comes to Carnegie Mellon frequently to talk to students about what needs to be improved at the school. Students describe him as down to earth, friendly, and very candid. While he has been an extremely successful hedge fund manager, he does not lead an extravagant lifestyle and continues to deliver excellent results to investors. His philosophy is very simple: if you treat people right, run your business right, and run your life right, you will create a sustainable business.
The leveraged loan and high yield markets are currently on fire! Issuance is up 30% yoy, despite 2009 being a very strong year in issuances. Bank of America was leading the charge in market share, beating JPMorgan and taking 24%. JPMorgan, the nearest bank was only at 14% market share, due to its conservative underwriting standards.
According to Ioana Barza of Thomson Reuters, “The U.S. syndicated loan market is firing on all cylinders heading into the fourth quarter. Although increased volatility is becoming a market staple and poses challenges for underwriters, the upside is that loan issuance has rebounded on the back of a strong bond market.
Lending activity in 1-3Q10, at $716.5 billion, was up 92% from the $372.8 billion in the same period last year, and up 30% over full-year 2009 levels, according to Thomson Reuters LPC. Although refinancing activity has driven roughly 70% of U.S. loan issuance this year, the pickup in activity in the third quarter has been dramatic. At $226 billion, 3Q10 volume is up 131% from 3Q09.
While lending has been stepped up, 63% of senior buyside and sellside lenders surveyed by Thomson Reuters LPC said constraints to get deals done remain as financings are still getting done selectively. Only one-quarter of respondents believe there are now few barriers to getting deals done, and a meager 12% said risk aversion runs high at their institutions and they are somewhat constrained.
After slowing to a crawl in May and June, the high yield bond and leveraged loan markets made a strong comeback in 3Q10. As investors regained their footing, many sought refuge in fixed income. High yield bond issuance surpassed 2009′s full-year record of $146.5 billion, with $173 billion in volume through Sept. 29. Investors followed the relatively attractive yields and bond fund inflows recovered after the dramatic pullback in the spring on the back of the Eurozone debt crisis and fears of a U.S. double dip recession.
2010 mutual high yield bond fund flows (including funds reporting monthly as well as funds reporting weekly) stood at +$7.681 billion, through late September, according to Lipper FMI, a Thomson Reuters company. Just as investors voted with their feet with $4.6 billion in outflows in the spring, there have been over $8 billion net positive inflows since mid-June.
With record inflows and bond issuance, it is noteworthy that nearly 40% of bond proceeds were used to pay down loans this year. While this virtuous cycle came to a halt, with less than $4 billion in monthly paydowns in May, through July, bond-for-loan takeouts climbed to the $9 billion range in August and September. With this extra cash from pre-payments to reinvest back into loans, CLOs made a slow comeback (albeit with recycled liquidity) and secondary loan bids began to climb, and continue to grind higher.
At the end of 2Q10, the SMi100 average bid was down over 2 points, while gaining 2 points in 3Q10. However, investors continue to be somewhat selective. Loans originated post-crisis (i.e. 2008 to present) remain higher bid relative to the 2006-2007 vintages. In fact, roughly 70% of 2010 vintage loans remain bid between 98-100, thanks to bells and whistles like call premiums, Libor floors and OIDs.
With these names already highly bid, investors began to focus on the primary market in hopes of a lineup of new issue. And after Labor Day, they got just that as the institutional pipeline doubled in size, deals were launched one after the other and many were oversubscribed. All told, leveraged issuance reached $75 billion in 3Q10, up 50% over 3Q09 volume on the back of new issue, which was $43.37 billion.
Equity sponsors became increasingly active, pursuing dividend recaps and financing a number of large LBOs. As a result, sponsored issuance reached $41 billion, with $16.5 billion in the form of LBO financings. There was a smattering of covenant-lite deals and nearly $5 billion in dividend recap financings in 3Q10, spread across 11 deals – a sign that arrangers were ready to test risk appetite again. However, the $12.5 billion total volume of dividend recaps done so far this year is on par with what was done in a single quarter in 4Q06 and 2Q07. Lenders expect this trend to continue with recent announcements for Metaldyne, Angelica and Euro-Pro.
New deals have been successful in attracting a range of investors and yields have begun to recede, with $15 billion in facilities flexing down in 3Q10 (versus $6 billion in upward flexes). On average, issuers saw primary yields (including Libor floors, contractual spread, and OID amortized over four years) come down to 6.95% in September from 7.67% in August.
Although loan yields are coming down in the primary, they remain attractive – and not just to CLOs. Crossover investors are increasingly active in the space and loan mutual fund inflows have surpassed well over $6 billion this year. Investors plowed money back into the funds, with the largest one-week inflow of $480 million recorded in September. With strong demand, hefty oversubscriptions and downward flexes, the institutional pipeline, which stood at roughly $13 billion by press time on Sept. 30, is up significantly from where it was in August and nearly double the level in early September. Today’s pipeline is still lower than the $16-18 billion highs seen in April and May, but it is widely expected to grow heading into 4Q10.
While all signs point up in terms of new issue in the leveraged loan market, lenders are not sitting back. Demand, driven by loan paydowns via the bond market, remains volatile. With unpredictable fund flows and moves in equities, which in turn move the bond market, the virtuous cycle remains fragile.
With a surge in new CLOs not expected any time soon and existing CLOs slowly going static as their reinvestment periods come to an end over the next couple of years, lenders are concerned about the financing gap and their ability to address the refinancing cliff. But, for now, issuers continue to rely on the bond market for relief and lenders hope the virtuous cycle will continue in the short term.
Meanwhile, investment grade lenders grappled with Basel III and its possible implications for the loan market. Under Basel III, revolving credits, which make up the bulk of the investment grade market and are largely undrawn, are currently included in the “liquidity coverage ratio” that requires banks to hold liquid assets equal to 100 percent of all undrawn credit lines used for liquidity purposes. Under this scenario, revolving credits would become prohibitively expensive. In turn, borrowers could bypass loans altogether and go straight to the bond market, or draw down revolving credits and repay them immediately, or borrow via term loans and reinvest the cash. However, it is possible that revolving credits could be instead classified as credit facilities that would attract a lower 10% liquid asset coverage ratio.
With the implementation period pushed back, nearly 60% of senior lenders surveyed by Thomson Reuters LPC said they expect some impact on investment grade lending in the short term, although more clarity is needed around which category revolvers will fall under and nearly 40% said they don’t anticipate any impact.
3Q10 investment grade lending was up 140% over 3Q09 at $78.76 billion. Although the investment grade loan market has seen an increase in volume recently, issuers continue to rely on the bond market and corporates continue to sit on excess cash. But volume was not anemic just due to a lack of jumbo M&A transactions. This has been coupled with issuers’ reticence to return to market to refinance existing debt. And when they do come to market, many are downsizing. More recently, however, lenders note that as spreads have tightened, more issuers are considering coming back to the market ahead of any regulatory changes. As a result, the refinancing pipeline for 4Q10 is building.
Will issuers opt for longer tenors? Lenders say clients are just not interested in that incremental duration (or the costs that come with it) as they have confidence that they can refinance as needed, especially as demand for the investment grade asset continues to outweigh supply. Still, while three-year revolvers have increasingly become the norm, a four-year revolver market is emerging as well.
Looking ahead, lenders expect that investment grade lending in 4Q10 will be up dramatically over 4Q09′s anemic levels. However, much of this will be driven by refinancing activity rather than M&A financings. Lenders expect spreads to come down across the board, given the strong demand and the absence of event-driven transactions. Already, over $100 billion in facilities have been structured with market-based pricing (MBP) this year, which has surpassed the $96 billion logged in 2009 and many anticipate this mechanism will remain in place going forward. Nevertheless, lenders note that pricing may not have found a floor because lenders are eager to put money to work and meet budgets as year-end approaches.”
Lazard, famed investment bank and legacy of Bruce Wasserstein recently reported earnings that blew investors away. Operating revenues jumped 67% from one year earlier. Lazard advises on mergers & acquisitions, restructurings, and to a lesser extent, capital raisings. It operates from 40 cities across 25 countries throughout Europe, North America, Asia, Australia, and Central and South America, focusing on two business segments: Financial Advisory and Asset Management (explained below).
According to Bloomberg, “Lazard Ltd., the biggest non-bank merger adviser, rose in New York trading after posting adjusted earnings that beat analysts’ estimates on operating revenue that jumped 67 percent from a year earlier.
The loss for the first three months of 2010 was $33.5 million, or 38 cents a share, compared with a loss of $53.5 million, or 77 cents, in the same period a year earlier, the Hamilton, Bermuda-based company said today in a statement. Adjusted earnings were 46 cents a share, beating the 18-cent average estimate of 12 analysts in a Bloomberg survey.
Lazard’s revenue from advising on mergers and acquisitions climbed from a year earlier even as companies completed a lower value of deals in the quarter. Excluding special charges, the firm’s compensation ratio fell to 60 percent of revenue, compared with 75 percent in the first quarter of 2009.
“The report should give investors a booster shot of confidence on two important fronts,” Oppenheimer & Co. analyst Chris Kotowski said in a note to investors. “First, that the rebound in M&A activity is happening, albeit in fits and starts. Second, that the company is developing discipline around its compensation and other costs.”
Lazard rose 57 cents, or 1.5 percent, to $38.78 at 4 p.m. in New York Stock Exchange composite trading. The shares gained 28 percent last year after falling 27 percent in 2008.
Operating revenue rose 67 percent from a year earlier to a first-quarter record of $456.9 million. Operating revenue from financial-advisory services climbed to $269.1 million as fees from advising on both mergers and restructuring jumped more than 50 percent.
Revenue from merger and acquisition and strategic advisory climbed 53 percent from a year earlier to $147.6 million. That’s down 13 percent from the fourth quarter of 2009.
Asset management revenue climbed 78 percent from a year earlier to $183.7 million. Assets under management increased 4 percent to $135 billion from Dec. 31, with net inflows of $3 billion in the quarter.
“Both financial advisory and asset management had their best first quarters ever,” Chief Financial Officer Michael Castellano said in an interview. “We’re continuing to gain global market share in the M&A business.”
Compensation costs climbed 35 percent from a year earlier to $275.5 million. The firm also recorded a one-time $87.1 million expense tied to staff reductions.
‘Right Manpower Complement’
“Over the last two years, in addition to aggressively hiring senior bankers, we’ve also right-sized the firm in both asset management and the financial-advisory business, to make sure we have the right skill sets for the new world,” Castellano said. “I think we’ve now got the right manpower complement to be able to drive growth in both of the businesses.”
Kenneth Jacobs was named chief executive officer in November after the death of Bruce Wasserstein, the preeminent Wall Street dealmaker who took Lazard public in 2005. Jacobs, who has worked at the firm for 22 years, had served as deputy chairman and CEO of North American businesses since 2002, shortly after Wasserstein arrived.
Lazard said last month that Castellano will retire on March 31, 2011. He will be replaced by Matthieu Bucaille, who served as deputy chief executive officer of Lazard Freres Banque in Paris.
Lazard has been using its restructuring-advisory business to counter weakness in mergers and acquisitions. It was the second-ranked adviser in 2009 bankruptcy liquidations, according to Bloomberg data, and advised debtors or creditors in the top 10 Chapter 11 bankruptcies in 2009.
Companies worldwide completed $358.9 billion of deals in the first quarter, down 25 percent from the same period in 2009 and 52 percent from the first quarter of 2008, data compiled by Bloomberg show.
Lazard was the seventh-ranked financial adviser on announced deals and 12th-ranked on completed takeovers in the first quarter. The firm advised on completed deals totaling more than $33.9 billion, including Kraft Foods Inc.’s acquisition of Cadbury PLC.
Lazard employees own more than a quarter of the firm, excluding the estate of Wasserstein. Because the stakes owned by employees can be converted into common stock, the company reports earnings as though the stakes were fully exchanged instead of treating them as minority interest.
Evercore Partners Inc., the investment bank founded by former U.S. Deputy Treasury Secretary Roger Altman, reported earnings last week that beat analysts’ estimates as advisory revenue climbed from a year ago.
Lazard Business Breakdown
The Company offers corporate, partnership, institutional, government and individual clients across the globe an array of financial advisory services regarding mergers and acquisitions (M&A), and other strategic matters, restructurings, capital structure, capital raising and various other corporate finance matters. During the year ended December 31, 2009, the Financial Advisory segment accounted for approximately 65% of its consolidated net revenue. It has operations in United States, United Kingdom, France, Argentina, Australia, Belgium, Brazil, Chile, Dubai, Germany, Hong Kong, India, Italy, Japan, the Netherlands, Panama, Peru, Singapore, South Korea, Spain, Sweden, Switzerland, Uruguay and mainland China.
The Company advises clients on a range of strategic and financial issues. When it advises companies in the potential acquisition of another company, business or certain assets, its services include evaluating potential acquisition targets, providing valuation analyses, evaluating and proposing financial and strategic alternatives and rendering, if appropriate, fairness opinions. It also may advise as to the timing, structure, financing and pricing of a proposed acquisition and assist in negotiating and closing the acquisition. In addition, the Company may assist in executing an acquisition by acting as a dealer-manager in transactions structured as a tender or exchange offer. When the Company advises clients that are contemplating the sale of certain businesses, assets or their entire company, its services include advising on the appropriate sales process for the situation, valuation issues, assisting in preparing an offering circular or other appropriate sales materials and rendering, if appropriate, fairness opinions. It also identifies and contacts selected qualified acquirors, and assists in negotiating and closing the proposed sale. It also advises its clients regarding financial and strategic alternatives to a sale, including recapitalizations, spin-offs, carve-outs, split-offs and tracking stocks.
For companies in financial distress, the Company’s services may include reviewing and analyzing the business, operations, properties, financial condition and prospects of the company, evaluating debt capacity, assisting in the determination of an appropriate capital structure and evaluating and recommending financial and strategic alternatives, including providing advice on dividend policy. It may also provide financial advice and assistance in developing and seeking approval of a restructuring or reorganization plan, which may include a plan of reorganization under Chapter 11 of the United States Bankruptcy Code or other similar court administered processes in non-United States jurisdictions.
When the Company assists clients in raising private or public market financing, its services include originating and executing private placements of equity, debt and related securities, assisting clients in connection with securing, refinancing or restructuring bank loans, originating public underwritings of equity, debt and convertible securities and originating and executing private placements of partnership and similar interests in alternative investment funds, such as leveraged buyout, mezzanine or real estate focused funds. In addition, it may advise on capital structure and assist in long-range capital planning and rating agency relationships.
The Company’s Asset Management business provides investment management and advisory services to institutional clients, financial intermediaries, private clients and investment vehicles around the world. As of December 31, 2009, total assets under management (AUM) were $129.5 billion, of which approximately 82% was invested in equities, 14% in fixed income, 3% in alternative investments and 1% in private equity funds. During 2009, approximately 36% of its AUM was invested in international investment strategies, 46% was invested in global investment strategies and 18% was invested in United States investment strategies. As of December 31, 2009, approximately 89% of its AUM was managed on behalf of institutional clients, including corporations, labor unions, public pension funds, insurance companies and banks, and through sub-advisory relationships, mutual fund sponsors, broker-dealers and registered advisors, and approximately 11% of its AUM, as of December 31, 2009, was managed on behalf of individual client relationships, which are principally with family offices and high-net worth individuals.
The Company competes with Bank of America, Citigroup, Credit Suisse, Deutsche Bank AG, Goldman Sachs & Co., JPMorgan Chase, Mediobanca, Morgan Stanley, Rothschild, UBS, The Blackstone Group, Evercore Partners, Moelis & Co., Greenhill & Co., Alliance Bernstein, AMVESCAP, Brandes Investment Partners, Capital Management & Research, Fidelity, Lord Abbett, Aberdeen and Schroders.
Four years after its buyout, HCA, the largest hospital chain in the United States is preparing for an IPO that could raise as much as $3 billion for KKR and its investors. HCA has over 160 hospitals and 105 outpatient-surgery clinics in 20 states and England. The IPO would help the firm pay down some of its $26 billion in debt. The company is very well positioned to benefit from health care reform. According to Analysts, this specific IPO would be the largest in the U.S. since March 2008, when Visa Inc. raised almost $20 billion…A takeover of a public company of more than $6 billion including debt hasn’t been announced since 2007. HCA has fared much better than other mega-buyouts from 2006/2007, and is only levered at 4.8x trailing EBITDA.
According to Bloomberg, “HCA Inc., the hospital chain bought four years ago in a $33 billion leveraged buyout led by KKR & Co. and Bain Capital LLC, is preparing an initial public offering that may raise $3 billion, said two people with knowledge of the matter.
HCA plans to interview banks to underwrite the sale in the coming weeks, according to the people, who asked not to be identified because the information isn’t public. The sale, slated for this year, may fetch $2.5 billion to $3 billion, the people said. HCA’s owners, which include Bank of America Corp. and Tennessee’s Frist family, may seek $4 billion, said another person familiar with the plans.
The stock offering would be the biggest U.S. IPO in two years and help HCA pay off debt, the people said. The hospital operator may profit from the health-care legislation President Barack Obama signed into law on March 23 that provides for coverage for millions of uninsured patients, said Sheryl Skolnick, an analyst at CRT Capital Group LLC in Stamford, Connecticut.
HCA is “extremely well-positioned to benefit from health reform because their hospitals tend to be concentrated in significant markets” including Denver, Dallas, Houston, Kansas City, Missouri, and Salt Lake City, Skolnick said yesterday in a telephone interview. “Health reform was very important to this decision.”
Kristi Huller, a spokeswoman for KKR, and Alex Stanton, a Bain spokesman, declined to comment, as did Jerry Dubrowski, a Bank of America spokesman. Ed Fishbough, a spokesman for HCA, didn’t immediately respond to a phone call and e-mail seeking comment.
Private-equity firms spent $2 trillion, most of it borrowed, to buy companies ranging from Hilton Hotels Corp. to Clear Channel Communications Inc. in the leveraged-buyout boom that ended in 2007 and are now seeking to cut that debt before it matures.
U.S. IPO investors have been leery of companies backed by private equity this year. In the biggest offering so far, Bain’s Sensata Technologies Holding NV sold $569 million of shares last month at the low end of its estimated price range. In February, Blackstone Group LP’s Graham Packaging Co. and CCMP Capital Advisors LLC’s Generac Holdings Inc. were forced to cut the size of their offerings.
HCA may file for the IPO with the U.S. Securities and Exchange Commission as early as next month, said one of the people.
The IPO would be the largest in the U.S. since March 2008, when Visa Inc. raised almost $20 billion. HCA would be the biggest IPO of a private-equity backed company in the U.S. since at least 2000, according to Greenwich, Connecticut-based Renaissance Capital LLC, which has followed IPOs since 1991.
HCA’s owners put up about $5.3 billion to buy the company, according to a regulatory filing, funding the rest with loans from banks including Bank of America, Merrill Lynch & Co., JPMorgan Chase & Co. and Citigroup Inc. The IPO would lower HCA’s debt load rather than allowing owners to reduce their stakes, said the people.
The hospital chain’s purchase in 2006 shattered the record for the largest leveraged buyout, held since 1989 by KKR’s acquisition of RJR Nabisco Inc. HCA’s record was eclipsed by Blackstone’s acquisition of Equity Office Properties Trust and again by the 2007 takeover of Energy Future Holdings Corp., by KKR and TPG Inc., for $43 billion including debt.
Later that year, the global credit contraction cut off the supply of loans necessary to arrange the largest LBOs. A takeover of a public company of more than $6 billion including debt hasn’t been announced since 2007.
$25.7 Billion Debt
HCA, the largest U.S. hospital operator, had about $25.7 billion of debt as of Dec. 31, about 4.8 times its earnings before interest, taxes, depreciation and amortization, even before HCA’s owners tapped credit lines in January to pay themselves a $1.75 billion dividend. Tenet Healthcare Corp.’s ratio was 4.4 and LifePoint Hospitals Inc.’s was 2.85 at year- end, according to data compiled by Bloomberg.
Health-care companies have fared better than the average private-equity investment during the economic decline. KKR said in February that its holding in the company had gained as much as 90 percent in value as of Dec. 31, while stakes in Energy Future Holdings Corp. and First Data Corp. were worth less than their initial cost.
Hospitals will probably be “net winners” in the health- care legislation, said Adam Feinstein, a New York-based analyst at Barclays Capital, in a March 26 note to investors. HCA, Dallas-based Tenet and Brentwood, Tennessee-based LifePoint may gain because the legislation will reduce hospitals’ losses from providing charity care to the poor and uncollectible bills.
HCA has 163 hospitals and 105 outpatient-surgery clinics in 20 states and England, according to the company’s Web site.
The company was founded in 1968, when Nashville physician Thomas Frist Sr., and his son, Thomas Frist Jr., and Jack Massey built a hospital there and formed Hospital Corp. of America. By 1987, the company had grown to operate 463 hospitals, according to the company’s Web site. Thomas Frist Sr. is also the father of Bill Frist, a physician and the former Senate majority leader.
HCA went private in a $5.1 billion leveraged buyout in 1989, then went public again in 1992, according to the company Web site. In 1994, HCA merged with Louisville, Kentucky-based Columbia Hospital Corp. In the mid-1990s the company, then called Columbia/HCA Healthcare Corp., operated 350 hospitals, 145 outpatient clinics and 550 home-care agencies, according to the company.
In December 2000, HCA agreed to pay $840 million in criminal and civil penalties to settle U.S. claims that it overbilled states and the federal government for health-care costs. It was the largest government fraud settlement in U.S. history at the time, according to a U.S. Justice Department news release on Dec. 14, 2000.
A credit-market rally has helped HCA extend maturities on some of its debt. HCA has sold $4.46 billion of bonds since February 2009 in a bid to repay bank debt and delay maturities, according to data compiled by Bloomberg. The company still has about $11 billion coming due over the next three years, according to Bloomberg data. It is also negotiating with lenders to amend the terms of a bank loan.
HCA offered earlier this month to pay an increased interest rate to lengthen maturities on $1 billion of bank debt, according to two people familiar with the matter. The amendment would allow HCA to move part of the money due under its term loan B to 2017 from 2013. Even after the refinancing and debt pay downs, the company will still have to access the “capital markets to address remaining maturities,” said Moody’s Investors Service Inc. in a note last month.
“It will be difficult for the company to meaningfully reduce the amount of debt outstanding through operations due to limited free cash flow generation,” Moody’s said.”
Here is an article from 4 years ago by the NY Times describing the mega-buyout:
“HCA, the nation’s largest for-profit hospital operator, said today that it had agreed to be acquired by consortium of private investors for about $21 billion. The investors will also take on about $11.7 billion of HCA’s debt.
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The overall deal, which the company valued at about $33 billion, would rank as the largest leveraged buyout in history, eclipsing the $31 billion takeover of RJR Nabisco in 1989 by Kohlberg Kravis Roberts & Company.
The group of buyers is led by the family of Senator Bill Frist, the Senate majority leader. His father, Thomas Frist Sr., and his brother, Thomas F. Frist Jr., founded HCA.
The other investors are Bain Capital, Kohlberg Kravis Roberts and the private equity arm of Merrill Lynch.
The deal appears to be driven by trends both on Wall Street and in the health care industry. For one thing, the private equity business — in which investment companies pool capital from investors in order to buy companies and then resell them or take them public — is swimming in cash. And private equity firms are eager to invest in a company like HCA, which generates a lot of revenue and, judging by its stock price, is seen as undervalued by investors.
Like many other for-profit hospital companies, HCA has seen its stock perform poorly in recent years. The whole industry has struggled with increasing amounts of bad debt, as more people fail to pay their bills because they do not have sufficient health insurance or any coverage.
Separately, various private equity firms have made a number of huge deals recently: Univision for $12.3 billion in June; $22 billion for Kinder Morgan in May; General Motors’ finance unit, GMAC, for as much as $14 billion in April.
Earlier this month, the Blackstone Group said it had lined up $15.6 billion in commitments for its latest buyout pool, forming the world’s largest private equity fund.
HCA was taken private once before, in the late 1980’s by the company’s management, which at the time thought it was undervalued. The move turned out to be a success, and HCA went public again a few years later.
Today’s deal promises to generate large fees for Wall Street bankers and lawyers, who have been toiling away on the transaction for months. Credit Suisse, Morgan Stanley and Shearman & Sterling are advising HCA; Merrill, Bank of America Corporation, Citigroup Inc., J. P. Morgan Chase and Simpson Thacher & Bartlett are financing and advising the buying group.
HCA is the nation’s largest for-profit hospital chain, with 2005 revenues of roughly $25 billion. Based in Nashville, Tenn., the company operates about 180 hospitals and nearly 100 surgery centers.
After merging with Columbia Hospital Corporation in 1994, HCA became the subject of a sweeping federal Medicare fraud investigation; it agreed to pay $1.7 billion to settle the matter. Thomas Frist Jr., who had left HCA’s management before the fraud charges arose, eventually returned as chief executive in 1997. He stepped down as chairman in 2002, but he remains on the company’s board of directors.
Senator Frist’s ties to the company have drawn criticism over the years, as he has been active in the Senate on a variety of health-care initiatives that have the potential to affect the large hospital company. Last fall, the Securities and Exchange Commission began an investigation into his decision to sell stock, once estimated to be worth more than $10 million, which was held in a trust.
Mr. Frist sold the stock in June 2005, just as the price of HCA stock peaked and shortly before it fell the following month; the sale was disclosed in September. He has said that the timing of the sale was a coincidence, the result of a decision to divest his holdings in the company, and that he is cooperating with the investigation.
Under the terms of today’s deal, the consortium of investors would pay $51 a share for HCA’s outstanding common stock, roughly 15 percent more than the company’s trading price early last week, when word spread that the negotiations had faltered. Today, HCA’s stock rose $1.61, or 3.4 percent, to close at $49.48 on the New York Stock Exchange.
The investor consortium is expected to borrow about $15 billion to finance the deal. But with the high-yield bond market tightening, raising that amount could be a challenge.
There is also the possibility that another group could emerge with a rival offer. HCA has included a provision in its deal with the investor consortium that allows it to actively seek a higher offer. Firms like the Blackstone Group and the Apollo Group, as well as rival hospital operators, could try to bid.”
Months after the financial crisis and shadow banking fiasco that led the United States into a severe credit crunch and near depression, the U.S. government is making profits on selling warrants and shares of financial firms that received TARP funds. The U.S. government could earn more than $7 billion in its $32 billion stake in Citigroup soon. Morgan Stanley will be managing the sale of the government’s stake. The investment bank is advising the U.S. to avoid a block sale at a discount to current prices to avoid forcing the price of Citi shares to fall quickly.
According to Mr. Smith and Ms. Solomon of the WSJ, “The U.S. government could earn a profit of more than $7 billion on its investment in Citigroup Inc. under its plan to sell off its $32 billion stake over about six months, people familiar with the matter said.
The government said it hired Morgan Stanley to manage the sale of its 27% holding in the bank, which is one of its last remaining stakes in a Wall Street banking giant. The government would sell 8% to 10% of the shares traded daily, according to people familiar with the plan.
At the current market price, the planned sale to investors would give the government a profit of about $7.19 billion on its original $25 billion investment under the government’s Troubled Asset Relief Program.
If that price level holds up, it would be the largest U.S. profit on any such TARP investment, exceeding $4.27 billion on dividends and sale proceeds from preferred stock and warrants in Bank of America Corp., according to Linus Wilson, a finance professor at University of Louisiana at Lafayette.
The Treasury’s sale plan applies only to its holding of 7.7 billion common shares. The U.S. also owns $5.3 billion of Citigroup trust-preferred securities and warrants to buy 465.1 million shares. Under the so-called dribble-out plan announced Monday, the government will initially sell the Citi shares steadily in the market rather than try a giant “block” sale at a discount to the market price.
The last big Citigroup sale in December, aimed at repaying a $20 billion government holding of preferred stock, came at a big discount to the market price after several other big bank stock sales, depressing the market price for Citi’s stock for two months.
At Citigroup’s current market price, the planned sale to investors would give the government a profit of more than $7.19 billion on its original $25 billion investment under the government’s Troubled Asset Relief Program. Above, a Citibank branch in San Francisco.
At the time of that sale, the Treasury agreed not to sell its remaining 7.7 billion shares until March 16. The agency has said it planned to sell the stock this year, and the price has recently been surging in anticipation that the overhang of government ownership would be eliminated.
The stock rose last week on reports that the government would avoid a block sale at a discount to the market, according to Jeffrey Harte, an analyst at Sandler O’Neill & Partners LP.
However, the Treasury didn’t rule out a block sale later, saying only that the sale would begin under “a pre-arranged written trading plan.” Citigroup shares fell 13 cents, or 3.02%, to $4.18 in 4 p.m. trading on the New York Stock Exchange.
Because of its low price and volatile fortunes, Citigroup stock has traded heavily over the past year. Since Dec. 17, it has accounted for 10% or more of NYSE volume on 31 different days. At its recent daily average volume of 500 million shares, the Treasury could sell 50 million shares daily at the 10% target, a pace at which the sale would take about seven months.
The government’s possible profit on the Citi stake represents an unexpected windfall from an investment originally designed “to prevent an even worse recession,” said Douglas Elliott, an analyst at the Brookings Institution, a Washington, D.C. policy research organization.”