Filed under: Financials and analyticals, Raising money, Texas Pacific Group, Investments, Value and lack thereof

There was an interesting report that surfaced over the weekend that took greater hold on Monday morning, yet nothing official has been released.

Washington Mutual (NYSE: WM) shares are rising sharply this day on “weekend talk” that they will be supported by an investment from private-equity group led by TPG Inc, also known as Texas Pacific Group. The company has been forced to write-down billions on home-mortgages and loan losses since the credit crisis, and WaMu is also one of the large quasi-money-center banks that is at-risk of being in jeopardy on its own. According to Reuters, it said “a source” says the deal could be announced as soon as this day

It could be a substantial investment of some $5 billion, although once you get into details the number mysteriously changes wildly among sources as far as terms and as far as dollars. Whatever it is, it’s working for the banking giant whose stock has been battered. Shares are up $2.70, over 26%, to $12.87 on the speculation. The 52-week range is $8.72 to $44.66.

What is perhaps more interesting than anything, is that this doesn’t necessarily include Wells Fargo (NYSE: WFC). That company has been listed as one of several companies in a position to be a savior for distressed financial companies. This would also lend credibility to a bank or private equity saving grace for National City Corp. (NYSE: NCC), which has also been in the soup.

If private equity ends up being a savior for the banks, even if it is an iconic trend it would be nothing short of ironic if you’ve been reading about all the private equity deals that have failed.

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Filed under: Financials and analyticals, Private equity industry

JP Morgan Chase & Co. (NYSE: JPM) has announced the launch of DealVault. This is a new technology that tracks private equity investments valuations, performance, risk and exposure analysis. JP Morgan’s unit called Private Equity Fund Services (PEFS) developed the system to provide CFOs, deal and investor relations professionals with a platform to centralize deal tracking information.

DealVault will also integrate with bookkeeping and back office systems, in order to grant administration one platform. Private equity managers will be able to store portfolio company information in a web-based solution, package information in an auditor-friendly format, grant independent valuation reviews, and to cut time spent aggregating and reconciling volumes of data.

This “PEFS” unit already provides a full suite of administration services to private equity firms, real estate firms, and institutional investors; and it currently services more than 200 funds representing $50 billion in committed capital, and serves the world’s largest institutions with $110 billion in aggregate committed capital across thousands of private equity investments.

Does something seem wrong or off about the timing of this launch? In 2006 this would have garnered much attention. In 2007 it would have been mandatory. While the billionaires are all supposed to be immune to economic sensitivity, that just isn’t quite holding up right now. Another wave of private equity will come again, at least that’s what history dictates. But the launch timing is probably one that could have been picked better.

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Filed under: Financials and analyticals, Private equity industry, Management fees

It’s been a year since Fortress Investment Group (NYSE: FIG) went public. At that time, the offering got a nice reception. After all, investors were hungry for hedge fund and private equity operators.

Of course, that’s no longer the case. And the stock of Fortress has gone from $34 to a low of $9.50.

Well, this week, the firm announced its fiscal Q4 results. There was a net loss of $29.3 million, or $0.43 per share and pre-tax distributable earnings were down 43% to $78 million, or $0.18 per share. Revenues were also lackluster - falling 22% to $196 million. Even though, with a large amount of assets under management (roughly $33.2 billion), Fortress saw a 43% spike in management fees.

With the roiling credit and equity markets, it’s tough to complete deals. As a result, there hasn’t been much chance to realize gains.

Despite all this, the Fortress conference call was upbeat. Keep in mind that the company focuses on asset-based investments, which tend to have less leverage and lower valuations. Besides, as major banks repair their balance sheets, there should be opportunities for players like Fortress to get some choice deals.

Interestingly enough, Fortress thinks that the second half of 2008 will be quite active. And, if the company can scoop up some transactions at compelling valuations, it could position itself nicely for the next couple years, when things get back to normal.

Tom Taulli is the author of various books, including The Complete M&A Handbook and The Edgar On the web Guide to Decoding Financial Statements. He also operates DealProfiles.com.

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Filed under: Financials and analyticals, Raising money, Private equity industry, Investments

There has been much speak about how the credit squeeze and slowing economy has affected the public markets, but how has it affected private-equity firms? An article in the Hartford Business discusses how private equity firms are feeling the pain, especially as many private-equity owned companies have very high risk ratings and default risks. This appears to be more concerns of the past coming to fruition over leverage and credit quality more than breaking news, but it might come front and center before long.

Additionally, private equity-backed companies have big debt loads and when combined with decreased consumer spending, companies have less cash to service those loans. Leverage has enhanced returns, but it also augments the losses and decreases the returns to the private-equity firms that own the companies. This says that 25 of the 42 companies that ratings agency Standard & Poor’s says have the lowest credit ratings are owned or controlled by private-equity firms, which gives them the highest chances for default.

It also appears that many private-equity firms overestimated the potential value and performance of the companies they bought, or at least that conditions exists now that credit is tight and the economy slower. If many industries and sectors are struggling in today’s economy, it should come of no surprise that private-equity firms that purchased them with leverage are feeling the burn as well. A less-leveraged economy isn’t leaving the billionaires entirely immune.

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Filed under: Management, Financials and analyticals, Raising money, Shareholders

First and foremost, calling this JP Morgan Chase (NYSE: JPM) $236 million buy of Bear Stearns (NYSE: BSC) an acquisition is a stretch beyond what words can say. The $2.00 per share offer is perhaps the biggest fleecing of a deal ever. You probably heard takeover rumors on Friday regarding Bear Stearns. Well, this weekend it’s true. The exception is that this is a take-under of the largest magnitude seen in the industry over at least the last two decades.

Frankly, the office building in New York alone is worth more than that. Add on the prime brokerage business. Then add on its equity underwriting business. The problem is all of its counter-party and derivative operations where the liabilities can theoretically never end on the fixed income side.

Back in January when the bad financial institution situation went from bad to worse, I noted that financial mergers may be mandated rather than preferred. Do the math. The Fed is providing financing for up to $30 Billion of Bear’s less liquid assets, and close to $20 billion appears to be for mortgage related assets. Jamie Dimon and friends are stepping in for a fraction of what this used to be. $2.00 this day, $30 on Friday, more than $60.00 a week ago and over $150.00 a year ago.

Many will try comparing this to Drexel Burnham Lambert implosion. That company wasn’t public. That company was more of a junk bond player that didn’t create as much of a systemic failure risk compared to this. You can’t blame Jamie Dimon for being opportunistic like this, but the management team at Bear Stearns just got scarred for life.

Bear Stearns at first wasn’t able to cease this run on the bank that happened last week and shortly before. But the firm put itself in this position over time with all of its leverage and there is ultimately no one to blame here but Bear Stearns itself, and its management that allowed this.

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Filed under: Deals, Management, Financials and analyticals, Merrill Lynch, Shareholders

Cumulus Media Inc. (NASDAQ: CMLS) has an SEC FILING this morning noting that the company has received necessary consent from the lender group under its existing credit agreement that would grant it to enter into an amendment to permit a merger. It had previously noted on March 5, 2008 that it had entered discussions with lenders.

Members of the lending group holding in excess of 50% of the debt required to enter into an amendment gave their consents. The management-led merger would be with an investment group led by its Chairman, President & CEO Lewis W. Dickey Jr. and an affiliate of Merrill Lynch Global Private Equity, part of Merrill Lynch (NYSE: MER).

This isn’t a done deal yet as merger completion remains subject to various conditions. Some conditions include approval by shareholders, FCC approval, and other customary closing conditions. The original buyout price was $11.75. On last look, shares were up more than 12% at $5.51, and the 52-week trading range is $4.90 to $11.74.

This has been one of the longer standing mergers as it was announced back in July 2007 right at the peak of the world being awash in liquidity and the height of private equity deals. On last look, the company had roughly 345 radio stations in 67 U.S. markets. Its market cap as of today is $238 million.

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Filed under: Financials and analyticals, The Carlyle Group, Investments

The Carlyle Group is apparently downplaying reports of recent losses tied to loans. The private equity giant issued a statement on Tuesday to outline its exposure to Carlyle Capital Corporation.

Reuters also has a piece describing the situation. In the report, The Carlyle Group said that the $150 million credit line to affiliate Carlyle Capital Corporation will have a limited impact on The Carlyle Group and its affiliates.

Carlyle Capital is a legally independent entity from The Carlyle Group, and as such it would technically have limited real damages to the parent even if it trades residential mortgage-backed securities. Having this corporate structure with different entities is the same reason that movie studios keep individual entities for each movie, and it is the reason that conglomerates keep entities separated from each other. This keeps the issues inside one operation from ever toppling the whole group.

One note was one of the Carlyle Group’s investment funds or portfolios hold Carlyle Capital shares. Carlyle said that the The Carlyle Group is working tirelessly with Carlyle Capital Corp to “assist it in its efforts to maximize value for all interested celebrations.”

Unless they’ve figured out a way to start making firms give real bids on loans, they can try to aid all they want. It’s just going to take some time and some pain for this to work itself through the system. The pain isn’t yet over. I’ve shown how vulture filings are starting to crop up. Maybe that is the solution.

There is one issue that may be more pressing than any real monetary losses, and that’s the “image fallout” that Carlyle would take.

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Filed under: Rumors, Financials and analyticals, Investments

If you think the mortgage and financial meltdown will kill all rumor in the financial sector, think again. Bear Stearns (NYSE: BSC) shares are trading up today and even the stock options are active on the Friday Rumor Mill that the troubled brokerage firm could be for sale or have an expanded stake from China’s CITIC.

Today is also options expiration date, so we looked further out the expiration calendar beyond February. Options are active in March from the $85 to $105 strike prices on call options. April is actually quiet. Specifically these March $85 call options. The July $75 and $100 strike prices each saw over 1,000 contracts trade.

What is interesting is that there is another report here that noted that Bear Stearns and CITIC may alter their terms. This may or may not be the case. Most sovereign funds so far are having to stick to original terms. It wasn’t that long ago that they were criticized for taking huge stakes in critical US companies. These funds may just have to take their deals as is if they want to keep buying up properties.

Bear Stearns has been the perpetual merger rumor target in the rumor mill for literally over 10-years now that I am aware of personally. When I was a bond broker in the early and mid-1990’s, that was a typical “FRIDAY RUMOR” and then since switching to the equity side of the equation after the mid-1990’s this “FRIDAY RUMOR” persisted one and off numerous times each and each years since then. Even Warren Buffett has been noted as a rumored buyer before. It appears that even the CDO and mortgage meltdown doesn’t kill some rumors.

Who knows for sure…. Some time you might expect the merger to actually happen.

Bear Stearns stock is up this day while many competing investment banks are not so lucky. Shares were up over 5% in afternoon trading to over $83.00 on nearly double average volume. It appears that a current pullback is being attributed to David Faber reporting on CNBC that these rumors are not likely true.

Jon Ogg is an editor and partner of 247WallSt.com.

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Filed under: Financials and analyticals, Investments

Moody’s (NYSE:MCO) wants to replace its old ratings system, which used letter grades, with a new one which will use numbers. It also wants to put “warning labels” on securities like CDOs because they’re complex and hard to rate.

Story continued at 24/7 Wall St.

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Filed under: Financials and analyticals, Raising money, Private equity industry

BusinessWeek reports that The Bear Stearns Companies (NYSE: BSC), which reported earnings today, is behind $10 billion worth of Collateralized Debt Obligations (CDOs) at Citigroup Inc. (NYSE: C) and Bank of America (NYSE: BAC). It all comes down to yet another new word to add to your financial vocabulary — Klio Funding — a brand of CDO that enabled Bear to sell to the $2 trillion money market fund industry.

What is Klio Funding and how did it cause all this damage? Klio Funding is “an entity” that sells Commercial Paper (CP) — short-term loans — and uses it to purchase higher-yielding long term investments. Since Citigroup had concurred to refund investors’ initial stakes plus interest — through liquidity puts — money market funds that bought Klios thought they would get higher yields at low risk.

Meanwhile, Ralph Cioffi — who headed up three Bear hedge funds which eventually folded — used money raised from the Klios to purchase CDOs and to lock in year-long financing for his hedge funds. This is significant because hedge funds typically can only borrow money for weeks at a time due to their risk. Cioffi’s CDOs were popular, raising $100 billion.

The Klio structure turned out to be a pyramid scheme according to Yale University economist Robert J. Shiller. As new investors arrive to the celebration, they bid up prices, boosting returns for those who got in earlier. The large gains attract more investors, and the cycle continues — as long as the players don’t try to take out their money en masse.

That’s exactly what happened this spring. Cioffi tried to sell more CDOs to raise money to prop up the hedge funds he managed. But just after raising $4 billion in Might, his hedge funds imploded, wiping out $1.6 billion of investors’ money. In November, Citigroup and Bank of America wrote down some $10 billion in CDOs thanks to their liquidity puts. The financial system faces at least $500 billion in write-downs — creating a big capital hole that needs to be filled.

The lesson for investors is clear. If you hear lots of new vocabulary words coming out of Wall Street, someone is making massive amounts of money in the short-term that’ll eventually blow up, leaving others to pay the costs. If you’ve invested in something with a name you don’t comprehend, find out what it is. If it sounds too good to be true, it probably is.

We already know that James Cayne, Bear’s CEO, is paying the price by not getting a bonus. The question is whether he’ll be able to keep his job.

Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter. He owns Citigroup shares and has no financial interest in the other securities mentioned.

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