Tuesday, 26 February 2013

Burning bridges . . .

Up yours baby! . . . Italy has thumbed it's nose at Europe and the people have spoken. The question now is will the President be able to get a coalition together, or will they go to another election at which point surely people will be given the chance to cross the Rubicon back to the north or burn the bridges and prepare for the IMF in the form of Christine Lagarde to come waltzing down the peninsula.

Whatever happens will now start a period of risk in the market meaning that Fridays rally was the nervous shorts covering.

I miss a lot of stuff, but I'm not easily surprised. Here's a thought . . . usually within the financing for an LBO a lot of the lower quality paper is in that 5 - 10 year duration range, which going back to the "silly period" of 2005 - 07 means we're about to see paper maturing that might push a few deals into the courts. Today's example is rump of the TXU deal  (aka Energy Future Holdings Corp.) the then record- setting leveraged buyout by KKR & Co., TPG Capital and other notables including the Goldman Private Equity could become the biggest bankruptcy of a private equity-backed company since the failure of Chrysler Group LLC. Basically the restructuring talks have already started because the likelihood is that if you own some of the bonds etc. linked to this deal you won't be getting back 100cents on the dollar in 2015.

The Energy Future  buyout as it came to be known was essentially a bet on natural gas, the price of which has collapsed and currently sits 77% below the prices at the time of the deal. Readers of my blog will remember me mentioning the situation of a number of hedge funds in relation to the natural gas price. One investor in 2011 told me it was the most compelling commodities bet he'd seen in years and that if the fund I was then setting up made it a core position we were sure to get some investors. There was a rally, but it wasn't the "ball tearer" that many hoped for. Back to the current day and the $40.1 billion of debt that the KKR consortium put together on the back of 8.3bn of their group's equity. It's time now for the first tranche to get repaid. Good luck with that. I suggest investors watch out for senior paper trading at a level where the debt for equity swap into the new entity might make sense. I have no insight on any of the bonds but as usual will make the appropriate calls to see where things are trading.

A sour deal like the TXU one could impact financing rates for the current M&A mania. If that happens my theory of a yield led M&A boom is going to take a hit. Please be careful in these markets.

I managed a short ride today to help my wife with her training for this weekends NSW cycling event . She rides a white and pink Pinarello FP7 made with Toray's 46t carbon. It's a nice machine with a minor drawback that it uses SRAM Force as a groupset. I'm promising to swap that to Campagnolo if she gets into daily biking . . . . but it's a chicken and egg thing. So that we matched I took my Pinarello out and it was a pleasure. I'm thinking of putting the Fulcrum Racing Zeros in order to go further afield without the tubular tyre puncture risk that I have on the Boras. A great morning for me.


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