Ohio’s attorney general sued Standard & Poor’s, Moody’s and Fitch Ratings on Friday, asserting that they provided misleading credit ratings that led to hundreds of millions of losses for state funds.
The official, Richard Cordray, filed the lawsuit in United States District Court for the Southern District of Ohio on behalf of five Ohio funds that assert they lost more than $457 million because of “false and misleading ratings” of mortgage-backed securities by the ratings agencies.
Officials at Moody’s and Standard & Poor’s, which is owned by McGraw-Hill, could not be immediately reached for comment. A spokesman for Fitch Ratings, which is owned by Fimalac S.A., had no immediate comment.
Ohio’s lawsuit is the latest in a string of actions against the ratings agencies, which have been criticized for feeding the housing slump and credit market turmoil by assigning high ratings to risky securities that later tumbled in value.
Attorney General Andrew Cuomo of New York ended an investigation of rating agencies last year by striking a pact that changed the way they charge fees for reviewing mortgage-backed securities.
Attorney General Richard Blumenthal of Connecticut has also investigated the rating agencies.
Mr. Cordray’s lawsuit was filed on behalf of five major funds — the Ohio Public Employees Retirement System, the State Teachers Retirement System of Ohio, the Ohio Police & Fire Pension Fund, the School Employees Retirement System of Ohio and the Ohio Public Employees Deferred Compensation Program.
Go to Article from Reuters via The New York Times »
Friday, November 20, 2009
Thursday, November 19, 2009
Mid-Market Deal Trends
The post-lunch panel at The Deal Economy 2010 conference in New York City on Wednesday discussed the middle-market sector, where M&A has been on the rise.
Nathaniel Baker, a senior editor at The Deal, moderated the panel, which included Steve Deedy, a managing director at Alix Partners;Ken Hanau, a managing partner at 3i U.S.; Jim Epstein, a partner with Pepper Hamilton LLP; and Randy Schwimmer, senior managing director and head of capital markets at Churchill Financial.
Baker began the panel by noting his recent feature story Waiting to exhale in The Deal magazine, which explores how dealmakers are cautiously optimistic but fearful that the continuing paucity of credit could derail any middle-market rebound before it gets properly started.
Baker then asked the panel a series of questions:
Where is middle-market M&A dealflow, and what are some of the major issues affecting it?
Will lenders stay focused on middle-market deals?
What are the prospects for private equity investments and add-on acquisitions?
Which industry sectors and regions will remain vibrant?
Will cross-border and inbound investment continue?
Epstein addressed Baker's first question about middle-market M&A dealflow and some of the major issues affecting it. Epstein explained Pepper Hamilton splits midmarket into two categories: deals under and over $100 million.
"Of course, there's more credit available for small deals. LBOs are difficult above the $300 million to $400 million mark, but at least valuation gaps are shrinking," Epstein continued.
3i U.S.'s Hanau responded, "We've come a long way since March. People were fearful, but we're seeing a thawing out of credit markets. There is still caution, but the mindset is around growth."
Deedy said of the downturn, "PE firms were tending to focus on making portfolio companies healthy, but we're seeing a willingness to expand lately."
Baker followed up his question: "It sounds like there are plenty of buyers and sellers, and they're even willing to meet at a point in the middle. But where is debt financing these days?"
Churchill's Schwimmer responded, "There's definitely financing for small deals."
3i U.S.'s Hanau also offered a response, "There was so much liquidity on the sidelines. Valuations have not come off that much, and that's driven by the amount of capital on the sidelines that's waiting to be deployed."
Pepper Hamilton's Epstein explained PE is "still loathe to go to banks."
Schwimmer added, "People are still doing their credit homework. This isn't 2006."
Alix Partner's Deedy chimed in, "I agree there's a lot of money on the sidelines. Building products companies have been hit hard so it makes sense to go in there and get something on the cheap. But everyone's flocking to the same deals. Caution is also called for on future performance." Baker turned the panel's attention to lending. He asked: Who are the new lenders, and what types of terms are they offering?
Schwimmer opined, "The identity of midmarket investors has changed. A lot of banks have gone out of the midmarket lending business, but small banks are being adventurous. We'll see where they are in two years. Golub is one of a few colleagues that's still active. And of course special dedicated funds have cropped up in the past six months." It's worth noting as a side note that CLOs have been a bit discouraging.
Epstein said another area of access to debt is seller financing. "I've been involved in a couple deals that were purely seller financing."
Hanau thinks we shouldn't be concerned too much: "Like Randy said, banks are coming to the market, and we'll see more of that."
Baker recalled that building materials were mentioned as an attractive sector for dealmaking. He followed the segue by asking, "Are there others?"
3i's Hanau responded, "Well, our main reason is to go for U.S. companies that are global, such as in technology or industrials, tech and somewhat in healthcare."
Deedy said, "Building materials,, I think is just an opportunistic sector. You should also look at the 'green' space." He also mentions that there's not a lot of money chasing retail because of the volatility.
Schwimmer suggested you should "ask yourself what is going to be the consumer model -- where will they buy and where will businesses sell? Business services is a big growth area. Of course, healthcare is a big area, but it's hard to figure what small companies focus on. Then there's the overhang of Obamacare."
Epstein noted that you can also "look at this from a transactions perspective. Look at the GE-Universal deal. On a much smaller scale, you will find a lot off opportunities to benefit from regarding corporate carve outs."
Baker asked if there is any concern about consumer spending?
Alix Partners' Deedy said the consumer is important, and "2010 probably won't be big for three reasons: 1) Personal savings rates will be high; 2) unemployment will be high, there's no hockey stick-type recovery to look out for; and 3) politically, things will be hard, throwing money at it will be difficult."
Hanau said, "We're definitely cautious, even though Asia is doing well."
Schwimmer responded that "it's fascinating to see some headlines, to see retail sales being up. Businesses are raising the optics of value."
"What about strategic acquirers?" Baker asked.
Hanau said they will come back. They have better looking balance sheets than financial buyers, meaning private equity.
Epstein pointed out, "Corporates can use stock as currency and the markets have been headed in the right direction."
Schwimmer added that "smaller companies are raising their hands and saying 'Hey we can't do this alone.' As a No. 3 or No. 4 player, they're reaching out. They're banding together, and it will be competitive."
Hanau also noted, "You can't cut your way to glory. You do cost cutting for one reason -- to grow."
(Corporate Dealmaker has a string of stories noting how strategics have been cutting costs, such as jobs, while acquiring companies at the same time.)
Baker asked, "Where is financing?"
Schwimmer responded with his own question: "Does anybody remember what happened to that $280 billion deal pipeline? People love to have looming things over their heads, like ''2012' (referring to the movie). There's a high yield boom. Deals will get financed somehow."
Hanau added, "Yeah, we're already talking dividends. This will work itself out."
Epstein said to "look for the extension concept. You hit a maturity date, but the company is performing." Banks will give some leeway.
Deedy talked about "kicking the can down the road. There will be money out there. Also, there is the end of covenant-lite deals. Companies will have to be run more tightly. Rates will be higher; covenants will be more restricted."
Epstein said, "I think banks are going to take a second look at whether they will call default."
Baker opened the floor to questions from the audience, and one member asked about emerging markets.
Hanau answered, "Look at Asia and Brazil, Eastern Europe. Money will chase growth, but with growth comes risk. China and India are also areas for opportunity." - Baz Hiralal
Nathaniel Baker, a senior editor at The Deal, moderated the panel, which included Steve Deedy, a managing director at Alix Partners;Ken Hanau, a managing partner at 3i U.S.; Jim Epstein, a partner with Pepper Hamilton LLP; and Randy Schwimmer, senior managing director and head of capital markets at Churchill Financial.
Baker began the panel by noting his recent feature story Waiting to exhale in The Deal magazine, which explores how dealmakers are cautiously optimistic but fearful that the continuing paucity of credit could derail any middle-market rebound before it gets properly started.
Baker then asked the panel a series of questions:
Where is middle-market M&A dealflow, and what are some of the major issues affecting it?
Will lenders stay focused on middle-market deals?
What are the prospects for private equity investments and add-on acquisitions?
Which industry sectors and regions will remain vibrant?
Will cross-border and inbound investment continue?
Epstein addressed Baker's first question about middle-market M&A dealflow and some of the major issues affecting it. Epstein explained Pepper Hamilton splits midmarket into two categories: deals under and over $100 million.
"Of course, there's more credit available for small deals. LBOs are difficult above the $300 million to $400 million mark, but at least valuation gaps are shrinking," Epstein continued.
3i U.S.'s Hanau responded, "We've come a long way since March. People were fearful, but we're seeing a thawing out of credit markets. There is still caution, but the mindset is around growth."
Deedy said of the downturn, "PE firms were tending to focus on making portfolio companies healthy, but we're seeing a willingness to expand lately."
Baker followed up his question: "It sounds like there are plenty of buyers and sellers, and they're even willing to meet at a point in the middle. But where is debt financing these days?"
Churchill's Schwimmer responded, "There's definitely financing for small deals."
3i U.S.'s Hanau also offered a response, "There was so much liquidity on the sidelines. Valuations have not come off that much, and that's driven by the amount of capital on the sidelines that's waiting to be deployed."
Pepper Hamilton's Epstein explained PE is "still loathe to go to banks."
Schwimmer added, "People are still doing their credit homework. This isn't 2006."
Alix Partner's Deedy chimed in, "I agree there's a lot of money on the sidelines. Building products companies have been hit hard so it makes sense to go in there and get something on the cheap. But everyone's flocking to the same deals. Caution is also called for on future performance." Baker turned the panel's attention to lending. He asked: Who are the new lenders, and what types of terms are they offering?
Schwimmer opined, "The identity of midmarket investors has changed. A lot of banks have gone out of the midmarket lending business, but small banks are being adventurous. We'll see where they are in two years. Golub is one of a few colleagues that's still active. And of course special dedicated funds have cropped up in the past six months." It's worth noting as a side note that CLOs have been a bit discouraging.
Epstein said another area of access to debt is seller financing. "I've been involved in a couple deals that were purely seller financing."
Hanau thinks we shouldn't be concerned too much: "Like Randy said, banks are coming to the market, and we'll see more of that."
Baker recalled that building materials were mentioned as an attractive sector for dealmaking. He followed the segue by asking, "Are there others?"
3i's Hanau responded, "Well, our main reason is to go for U.S. companies that are global, such as in technology or industrials, tech and somewhat in healthcare."
Deedy said, "Building materials,, I think is just an opportunistic sector. You should also look at the 'green' space." He also mentions that there's not a lot of money chasing retail because of the volatility.
Schwimmer suggested you should "ask yourself what is going to be the consumer model -- where will they buy and where will businesses sell? Business services is a big growth area. Of course, healthcare is a big area, but it's hard to figure what small companies focus on. Then there's the overhang of Obamacare."
Epstein noted that you can also "look at this from a transactions perspective. Look at the GE-Universal deal. On a much smaller scale, you will find a lot off opportunities to benefit from regarding corporate carve outs."
Baker asked if there is any concern about consumer spending?
Alix Partners' Deedy said the consumer is important, and "2010 probably won't be big for three reasons: 1) Personal savings rates will be high; 2) unemployment will be high, there's no hockey stick-type recovery to look out for; and 3) politically, things will be hard, throwing money at it will be difficult."
Hanau said, "We're definitely cautious, even though Asia is doing well."
Schwimmer responded that "it's fascinating to see some headlines, to see retail sales being up. Businesses are raising the optics of value."
"What about strategic acquirers?" Baker asked.
Hanau said they will come back. They have better looking balance sheets than financial buyers, meaning private equity.
Epstein pointed out, "Corporates can use stock as currency and the markets have been headed in the right direction."
Schwimmer added that "smaller companies are raising their hands and saying 'Hey we can't do this alone.' As a No. 3 or No. 4 player, they're reaching out. They're banding together, and it will be competitive."
Hanau also noted, "You can't cut your way to glory. You do cost cutting for one reason -- to grow."
(Corporate Dealmaker has a string of stories noting how strategics have been cutting costs, such as jobs, while acquiring companies at the same time.)
Baker asked, "Where is financing?"
Schwimmer responded with his own question: "Does anybody remember what happened to that $280 billion deal pipeline? People love to have looming things over their heads, like ''2012' (referring to the movie). There's a high yield boom. Deals will get financed somehow."
Hanau added, "Yeah, we're already talking dividends. This will work itself out."
Epstein said to "look for the extension concept. You hit a maturity date, but the company is performing." Banks will give some leeway.
Deedy talked about "kicking the can down the road. There will be money out there. Also, there is the end of covenant-lite deals. Companies will have to be run more tightly. Rates will be higher; covenants will be more restricted."
Epstein said, "I think banks are going to take a second look at whether they will call default."
Baker opened the floor to questions from the audience, and one member asked about emerging markets.
Hanau answered, "Look at Asia and Brazil, Eastern Europe. Money will chase growth, but with growth comes risk. China and India are also areas for opportunity." - Baz Hiralal
No Bankruptcy M&A Slowdown
When people talk about dealflow slowing down, they're not referring to a slowdown in bankruptcy M&A," Anthony Baldo, editor of newsletters and databases at The Deal, said while moderating a panel on distressed debt at The Deal Economy 2010 conference in New York on Wednesday.
According to The Deal Pipeline, there have already been 527 deals in the bankruptcy space worth an aggregate $255 billion year to date. Last year at this time, there were 396 deals worth only $43.3 billion. In 2007, there were 289 deals worth $51 billion. This data shows that the marketplace is expanding.
This year, we've also seen:
398 "363 bankruptcy" sales worth almost $80 billion.
57 auctions involving credit bids, closed for more than $55 billion.
246 deals won by strategic buyers for a total of $45 billion.
One notable change from six months ago is there has been an uptick in prepackaged bankruptcies with a change of control element to them. One reason for this, according to Scott Winn, senior managing director at Zolfo Cooper, is that investors fear that bankruptcy will be too costly and will amount to a loss of control.
Prepackaged bankruptcies, whether they result in a debt-for-equity exchange or whether they result in an M&A transaction, shorten a company's time in Chapter 11, where adviser and counsel fees are being accrued, Winn said.
"Being in bankruptcy for four to five years can be very detrimental and risky," added Andrew Horrocks, managing director at Moelis & Co.
However, "the downside is that the underlying operating fix to a company does not occur [in a prepackaged bankruptcy], or at least it does not occur in context of restructuring," Winn concluded.
When looking for places to invest, Maria Boyazny, managing director at Siguler Guff & Co., suggested looking across five different categories."The distressed opportunity is very broad, compared to past distressed cycles, which focused on one or two areas," she said. "Looking around, spreads are at wide levels compared to historical standards, so distressed opportunities must be looked at comprehensively."
Those categories are:
Residential-mortgage-backed securities and home loan market, an $11 trillion market.
Commercial real estate and commercial debt market, a $3.5 trillion market in the U.S.
Corporate distressed debt leveraged loan market and the high-yield market, a $1.6 trillion and $1.1 trillion market, respectively, in the U.S.
Consumer debt, including student loans, auto debt and credit card debt, a $2.5 trillion market.
Municipal debt market.- Sara Behunek
According to The Deal Pipeline, there have already been 527 deals in the bankruptcy space worth an aggregate $255 billion year to date. Last year at this time, there were 396 deals worth only $43.3 billion. In 2007, there were 289 deals worth $51 billion. This data shows that the marketplace is expanding.
This year, we've also seen:
398 "363 bankruptcy" sales worth almost $80 billion.
57 auctions involving credit bids, closed for more than $55 billion.
246 deals won by strategic buyers for a total of $45 billion.
One notable change from six months ago is there has been an uptick in prepackaged bankruptcies with a change of control element to them. One reason for this, according to Scott Winn, senior managing director at Zolfo Cooper, is that investors fear that bankruptcy will be too costly and will amount to a loss of control.
Prepackaged bankruptcies, whether they result in a debt-for-equity exchange or whether they result in an M&A transaction, shorten a company's time in Chapter 11, where adviser and counsel fees are being accrued, Winn said.
"Being in bankruptcy for four to five years can be very detrimental and risky," added Andrew Horrocks, managing director at Moelis & Co.
However, "the downside is that the underlying operating fix to a company does not occur [in a prepackaged bankruptcy], or at least it does not occur in context of restructuring," Winn concluded.
When looking for places to invest, Maria Boyazny, managing director at Siguler Guff & Co., suggested looking across five different categories."The distressed opportunity is very broad, compared to past distressed cycles, which focused on one or two areas," she said. "Looking around, spreads are at wide levels compared to historical standards, so distressed opportunities must be looked at comprehensively."
Those categories are:
Residential-mortgage-backed securities and home loan market, an $11 trillion market.
Commercial real estate and commercial debt market, a $3.5 trillion market in the U.S.
Corporate distressed debt leveraged loan market and the high-yield market, a $1.6 trillion and $1.1 trillion market, respectively, in the U.S.
Consumer debt, including student loans, auto debt and credit card debt, a $2.5 trillion market.
Municipal debt market.- Sara Behunek
Friday, November 06, 2009
Private Equity Fires Back at Moody's
NYT DealBook, November 5, 2009, 5:45 pm — Updated: 7:51 am -->
Moody’s Investors Service seems to have touched quite a nerve with a new report that was critical of the private equity industry. The Private Equity Council, the main lobbying group for the industry, fired back on Thursday afternoon, noting that the report’s conclusions were open to “significant interpretation.”
The Moody’s report concludes that companies backed by private equity investors defaulted at a higher rate during the 21 months ending in October than similarly financed public companies. It contends that private equity firms invest virtually no capital in the companies they buy, especially those in distress.
The report also warns that many of the companies owned by private equity face significant refinancing risks in the next one to three years as more debt comes due.
The Private Equity Council noted that half of the private equity-backed company defaults examined in the study were not traditional defaults, but rather “opportunistic transactions to deleverage companies.”
If one filters out those transactions, the council said, the percentage of private equity companies in the sample that defaulted over the 21-month period falls to 10.2 percent. When annualizing this figure, it said, the annual default rate falls to 5.97 percent.
Stripping out these “opportunistic transactions” also has an effect on private-equity backed companies that have a speculative or “junk” credit rating, the council said. The adjusted speculative default rate was 8.4 percent, which is 29 percent lower than the overall American speculative-grade default rate for the 12 months ending in August, it said.
The Private Equity Council also took issue with its default rate in the 21 months covered in the report. While it acknowledged that the default rate was about 5 percent, the council said that annualized to a default rate of 2.91 percent, which is below the 3.5 percent annual default rate for speculative grade issuers from 1920-2008 and slightly higher than the estimated 1.6 percent annual private equity-backed company default rate.
The council also asserted that that Moody’s contention that private equity sponsors had not injected capital into their companies was “untrue.” The council cited data from Preqin, an alternative asset data provider, which noted that private equity funds had raised and invested $3.3 billion of equity capital to support their existing portfolio companies.
The council went on to note that Moody’s criticism ignored evidence that debt buybacks, which Moody’s classifies as defaults, could “do more to reduce a company’s leverage ratio than equity.”
– Cyrus Sanati
Moody’s Investors Service seems to have touched quite a nerve with a new report that was critical of the private equity industry. The Private Equity Council, the main lobbying group for the industry, fired back on Thursday afternoon, noting that the report’s conclusions were open to “significant interpretation.”
The Moody’s report concludes that companies backed by private equity investors defaulted at a higher rate during the 21 months ending in October than similarly financed public companies. It contends that private equity firms invest virtually no capital in the companies they buy, especially those in distress.
The report also warns that many of the companies owned by private equity face significant refinancing risks in the next one to three years as more debt comes due.
The Private Equity Council noted that half of the private equity-backed company defaults examined in the study were not traditional defaults, but rather “opportunistic transactions to deleverage companies.”
If one filters out those transactions, the council said, the percentage of private equity companies in the sample that defaulted over the 21-month period falls to 10.2 percent. When annualizing this figure, it said, the annual default rate falls to 5.97 percent.
Stripping out these “opportunistic transactions” also has an effect on private-equity backed companies that have a speculative or “junk” credit rating, the council said. The adjusted speculative default rate was 8.4 percent, which is 29 percent lower than the overall American speculative-grade default rate for the 12 months ending in August, it said.
The Private Equity Council also took issue with its default rate in the 21 months covered in the report. While it acknowledged that the default rate was about 5 percent, the council said that annualized to a default rate of 2.91 percent, which is below the 3.5 percent annual default rate for speculative grade issuers from 1920-2008 and slightly higher than the estimated 1.6 percent annual private equity-backed company default rate.
The council also asserted that that Moody’s contention that private equity sponsors had not injected capital into their companies was “untrue.” The council cited data from Preqin, an alternative asset data provider, which noted that private equity funds had raised and invested $3.3 billion of equity capital to support their existing portfolio companies.
The council went on to note that Moody’s criticism ignored evidence that debt buybacks, which Moody’s classifies as defaults, could “do more to reduce a company’s leverage ratio than equity.”
– Cyrus Sanati
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