Home Depot Hit As Credit Crunch Squeezes Deals

60 Days were enough to reduce the price by roughly 20 percent, force Home Depot to take an equity stake, guarantee some of the debt and eliminates lots of convenants that were given to the private equity buyer..... Look like the famous "private equity put" is still there but at a 30% lower pricelevel...... This deal looks similar to the Daimler/Ceberus/chrylser deal where Daimer was forced to step in to unload Chrylser.

60 Tage haben genügt um den Preis um 20% zu drücken, Home Deopt zu nötigen das sie entgegen dem ursprünglichen Plan eine Beteiligung behalten & noch zusätzlich für Schulden geradestehen müssen, die Kreditbestimmungen der Private Equity Käufer fast alle "lockeren Kreditbestimmungen" gestrichen worden sind usw......Sieht ganz so aus als wenn der sog. "Private Equity Put" der angeblich die Märkte nach unten absichert jetzt den Markt 30% tiefer absichert....... Dieser Deal ist fast ne 1:1 Kopie vom modifizierten Daimler/Ceberus/Chrylser Abschluß der Daimler ebenfalls zu ähnlichen Zugeständnissen genötigt hat um endlich Chrysler loszuwerden.

The global credit crunch has begun to put a squeeze on the buyout boom, with banks and private-equity firms forcing Home Depot Inc. to sell its struggling wholesale supply unit for much less than what had been agreed to just two months ago.

Home Depot's board yesterday agreed to sell Home Depot Supply for $8.5 billion to Bain Capital, Carlyle Group and Clayton, Dubilier & Rice, about 18% less than the price hammered out in June when the buyout boom was at its peak.

In addition, Home Depot itself will hold about 12.5% of the unit's equity, people familiar with the matter said, and guarantee some of the debt issued by the banks to finance the acquisition. That's significant because if the banks can't sell the debt in bond markets, and it sits on their balance sheet, they have to mark down its value, which some can ill-afford to do.

Just weeks ago, the buyout boom was a hugely profitable collaboration between private-equity firms and the Wall Street bankers who financed them. Now, amid the credit crunch, some private-equity firms and their bankers are at loggerheads as each camp tries to protect its bottom line, turning previously close allies against each other.

There are an estimated $400 billion in buyout deals working their way through the banking system. Wall Street committed to lend money for these deals as part of its plan to be in the "moving business," of packaging loans and equity stakes in the companies and selling them to investors, spreading out the risk of those transactions. With credit markets largely shut to big transactions, the banks have found themselves back in the old-fashioned "storage business," forced to keep the debt on their balance sheets and mark down its value.
Absorbing Write-Downs
In the process, the nation's banks might have to absorb tens of billions of dollars of write-downs. Such a toll would add to the pain of the far larger losses they are already toting up from the downturn in real estate and the meltdown in the market for mortgage securities.

That set the stage for the nasty squabble over HD Supply. The banks' argument: If the buyout firms could get a reduction in the price they were paying for the business -- Home Depot previously agreed to cut the price tag for the unit by about $1.3 billion to around $9 billion -- the banks should be able to change the terms of their financing for it and other deals. The buyout firms objected, saying a deal was a deal.

"This is what we pay them for," said one top buyout executive. "This is what underwriting is."

Caught in the middle are the companies that have agreed to be sold to buyout firms. Atlanta-based Home Depot, for instance, is suffering in part because of the downturn in the housing market and had planned to use the proceeds of the HD Supply sale to partially fund a $22.5 billion stock buyback plan. The $8.5 billion price tag will allow the retailer to go ahead with its buyback, a person familiar with the matter said, but it means that Home Depot will have sold the unit for little more than what it had spent to acquire the more than 40 wholesale contracting supply companies that make up the supply unit.

> More on the Home Depot buybacks / Mehr zu den Aktienrückkäufen von Home Depot

How Long Can Home Depot And Others Masked Poor Results With Buybacks?

Reviewing The Home Depot Buyback History.......

Among the features of the original HD Supply deal were many of the innovations private-equity firms have introduced in recent years in their pursuit of maximum flexibility. Those innovations denied the lenders many of the protections traditionally written into loan agreements. For example, there were almost no performance requirements set for HD Supply. If it chose not to use its cash to pay interest, the lenders would have no choice but to accept more debt instead of money.

> Here more on this issue that didn´t matter just 60 days ago....Convenant Lite Loans & Toggle Bonds

> Hier mehr zu diesem Thema das bis vor 60 Tagen noch überhaupt kein Problem gewesen ist....Convenant Lite Loans & Toggle Bonds

Unfortunately for the banks, investors have been on a buyers' strike recently and have refused to buy debt that gives them few rights.

Need for Flexibility
The banks argued that if the target company was so weak that the buyers needed all that flexibility, and refused to put in any terms and conditions, they shouldn't be buying the company in the first place. The lenders initially asked the private-equity firms to guarantee the debt involved in the deal -- which the private-equity firms say they refused to do.

A recent report from Citigroup's banking analyst estimated that J.P. Morgan was holding $40.8 billion of leveraged buyout financing, some of which may wind up on the bank's balance sheet if it can't syndicate the deals.

'Market Out' Provision
The banks had been on uncertain legal ground in pushing for changes in their commitments, according to lawyers who were involved in the deal and many who weren't. Rushing to establish market share in the buyout business, they largely dropped many standard financing conditions in deals struck for private-equity clients in the past few years. For instance, few recent deals have carried an arcane provision known as the "market out" that previously had allowed banks to pull out of commitment if the general financing market deteriorated. Even conditions for declaring an "out" for a specific target company's performance had been tightly drawn for the banks -- in contrast to the strengthened flexibility of private-equity firms when it comes to the ability to renegotiate or walk away.

> Goldman, JPMorgan Stuck With Debt They Can't Sell to Investors

Just three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged,

The revised deal reduces the amount of debt the banks provided to about $6 billion. As part of the deal, the private-equity firms agreed to accept higher interest rates on portions of the debt, which offset some of the firms' other concessions. The buyout firms will write checks for almost $2.5 billion. The banks, in turn, will try to raise the $6 billion in debt from investors so they don't have to provide the entire sum themselves.

Most in the market still expect the bulk of the remaining private-equity deals to be completed. They point to HD Supply and the controversy around it as unusual for two reasons. It is one of the few deals in which the value of the equity as well as the debt involved in the deal was underwater, given the original $10.3 billion price tag, and is unlikely to be resold at anything near the current price anytime in the next few years.

Still, investors are warily trying to determine if other buyout deals might fall victim to similar problems. They have been scrutinizing real-estate-intensive deals, such as the pending buyout of Hilton Hotels Corp. and Harrah's Entertainment Inc., as well as radio broadcaster Clear Channel Communications Inc., whose sector has been hurt in recent weeks.

And they are already toting up losses that the banks will have to put on their books. In the $27 billion deal for First Data, for instance, some investors are figuring that the debt issued in connection with the deal is already worth 10% to 13% less than envisioned. That could mean seven banks sharing paper losses of more than $2 billion. The last-minute accord on the Home Depot's unit, with a reduction in the amount of debt, offers a potential road map for other deals that would avoid drastic write-downs.

Kass: 'Don't Fight the Fed.' How Quaint

'Don't Fight the Fed.' This phrase will from now on put on the table almost every day from CNBC, Cramer, Wall Street etc. And with the macro news getting worse days by day it it probably their only argument for a long time to come. Remember that this new "Mantra" will be coming from the same guys that didn´t see the housing bubble, then said housing is contained, talked about a "Private Equity Put", said the market is cheap, there is cash on the sidelines, will come up with the Fed Model...

So it is good that Doug Kass is providing some "anti spin". The only thing that might dampen the slump a little bit is that the world economy is much stronger than during the past. But this won´t save the US from going into a recession.

'Don't Fight the Fed.' Diese Redewendung wird uns die nächsten Monate unweigerlich jeden Tag von Seiten CNBC, Cramer, Wall Street usw. begegnen. Und da sich die Marcodaten Tag für Tag verschlechtern bleiben aus Bullensicht natürlich auch nicht mehr allzu viele Argumente übrig. Man sollte dabei jedoch bedenken das dieses neue "Mantra" von denselben Leuten kommt die erst keine Immobilienblase erkannt haben, dann das Immobilienproblems als isoliert bewertet haben, die einen "Private Equity Put" gesehen haben, die steif und fest behaupten der Markt wäre günstig (trotz 30-40 % Finanzgewichtung), die Tonnen von Cash an der Seitenlinie vermutet haben, die das sog.Fed Model bemühen.........

Da tut es gut wenn Doug Kass wie üblich zum "Anti Spin" ausholt. Das Einzige was evtl. den Verfall etwas abmildern könnte ist die noch immer rund laufende Weltwirtschaft die sich so stark wie noch nie präsentiert. All das wird aber die USA nicht vor einer happigen Rezession schützen.

On Friday night, I appeared on CNBC's "Fast Money" and was asked a critical question: Why fight the Fed in maintaining a cautious market view? After all, the markets soared after the Fed eased in response to the Long Term Capital Management (LTCM) bailout in 1998.



I'll answer that question now.

Back in 1990-1992 and 2001-2003, the Fed lowered interest rates 100 basis points, secure in the belief that it had thwarted a recession. Both times, the Fed was wrong: A recession commenced, and a bear market in equities followed. For example, the DJIA soared nearly 3% with the surprise January 2001 interest rate cut. Three months later, the markets made new lows and ultimately fell 20% from the highs.

Seven years ago, the economy was soaring with real gains of about 4%, productivity was unprecedented, technology was in the midst of a renaissance, and the consumer was in fine shape. The LTCM issue was fairly contained; it was an isolated liquidity crisis in a hedge fund that was forced by the misuse of leverage and the insolvency of a relatively small economy, Russia.

The result was a 75-basis-point reduction in the fed funds rates, which restored calm in the financial markets in a matter of weeks.

Things are far different today.

Today, we face an economy that has far less promise with participants (consumers, hedge funds and borrowers of all kinds and shapes) all hocked up. Unlike 1998, today's housing market is in a sustained downturn, which will not likely recover until 2010. The consumer is at a tipping point, hedge funds don't hedge, and the world's economy faces a broad credit crunch. What was a liquidity issue seven years ago is both a liquidity and solvency issue today.

I have argued that, in the current credit cycle, nontraditional lenders have proliferated by circumventing Regulation T and banking reserve requirements, serving to soften or even dull the Fed's role in monetary policy. In turn, this systemic change has led to unusual borrowing in the form of interest-only and teaser adjustable-rate mortgage loans and levered quant hedge funds.

Furthermore, growth in the derivative market ran amok, serving to underwrite the sale of a broad-based group of products (such as motorcycles, automobiles, furniture, etc.) and also serving to brighten the markets for private equity.

This added liquidity from nontraditional lenders also buoyed the credit market, allowing companies that should have failed to tap large sums of equity and bonds. This created the feeling that all was well with the business world as stock markets rallied around the globe and corporate default rates hit all-time lows in 2006.

> Here are more charts that shows how deep the US consumer is in trouble

> Here mehr Charts die eindrucksvoll zeigen wie tief der US Konsument inzwsichen im Schuldensumpf steckt

But this was an illusion.

With credit being extended to everyone, the consumer -- already having ponied up to the Credit Bar Saloon -- went further into hock by loading up on ARMs and "no-money-down" durable (and nondurable) purchases. The hedge funds, in this period of mispricing of risk, got into the act by levering up in order to capture unsustainable returns. (According to Merrill Lynch hedge fund assets now approach $10 trillion, which is supported by less than $1.5 trillion of equity.)

The "hot money" provided by nontraditional lenders eventually led to what we have today and what I have described as a tightly wound financial system vulnerable to any interruption or negative event. The subprime mess was the event that triggered a chain reaction and a reassessment and repricing of risk; it was a ticking credit time bomb that most ignored -- until recently.

Pushing on a String
Pushing on a string means that the positive impact of lower interest rates is overwhelmed by the reduction in credit availability and the desire to borrow, as lenders try to improve the quality of their loan book and repair their balance sheets.
> I think the chart for corporate loans in 2006-2007 is looking similar

> Ich denke das der Chart für gewerbliche Kunden in 2006-2007 wohl ähnlich aussehen dürfte

The 50-basis-point reduction in the discount rate will likely be followed by further easing by the Fed, but it will do little good

The combination of stressed and stretched individual mortgage holders, a consumer levered far greater than in 1998, crippled nontraditional lenders, grossly extended hedge funds and debt-heavy subprime companies will exacerbate the downturn in the domestic economy in a far more severe manner than during the LTCM crisis. The two periods, quite frankly, are not even comparable in terms of how secure or shaky the economic foundation is.

Regardless of the Fed's actions, the odds favoring a 2008 recession have been increasing daily and until recently have been almost entirely ignored.

Political Consequences
After the LTCM mess in 1998, the Republican Congress was firmly in control and so was the security of lower taxes for both individuals and corporations. This is not the case in 2007, as the rising odds of a recession and the possible perception that the Fed is working as an agent for corporate America to bail out the hedge funds and troubled lenders already follows the Democratic midterm election victories of 2006.

Also, the growing schism between the haves and the have-nots in 2007 over 1998 will likely serve to give the Democrats the 2008 presidential election on a silver platter -- and with it, the headwinds of rising trade protectionism and higher taxes.

"Don't fight the Fed," a phrase promulgated by Marty Zweig, is one of those nonrigorous "truisms" that may no longer be useful. The markets in August 2007 have had the expected and Pavlovian reaction by immediately soaring; this is just what occurred on Jan. 3, 2001, after another surprise rate cut.

Back then, the Fed and the markets briefly thought that the threat of recession had been eliminated. It had not; we entered a recession soon thereafter. Today, the financial system is far more levered (and stressed) than in 2001, and a reduction in interest rates would simply ease a small portion of the pain of the debt excesses since 2000.

Our investment eyes need to be washed by tears once in a while so that we can see the markets and economy with a clearer view again. From my perch, we are in one such period. Everybody is going to hurt.

Fight the Fed.

The global merger boom - déjà-vu / Economist

great piece on the main source of stock market action in the last 12 month!

erstklassiger bericht über den haupttreiber der aktienmärkte in den letzten 12 monaten.

Feeling a sense of déjà-vu about the current takeover frenzy? It's different this time—but only up to a point


LAST year, as global merger activity breached the giddy levels of the dotcom era, markets partied like it was 1999. The bankers and lawyers who work on deals braced themselves for hangovers. But instead, glasses were refilled, the music cranked up and the guests were invited to dance through the night. Some $2 trillion of deals have been unveiled so far this year, putting it on track to smash the record set in 2006 by a whopping 60% or more. That would exceed even the rosiest predictions on Wall Street.

This week saw yet another surge in animal spirits. As the battle for control of ABN AMRO, a Dutch bank, took new twists, Alcoa, an American aluminium giant, launched a hostile bid for Alcan, a Canadian rival. In the wake of Rupert Murdoch's $5 billion unsolicited bid for Dow Jones, Thomson firmed up an £8.8 billion ($17.5 billion) offer for Reuters, a competitor in the newswire and financial-information business. And rumours swirled of a possible acquisition of Rio Tinto by BHP Billiton, its larger competitor, to create the world's biggest mining company.


Such bold forays have been encouraged by soaring stockmarkets. The Dow industrials has lately hit new highs with unusual frequency. China's markets have surged on record trading volumes, despite efforts by officials to talk them down. Forget the turmoil of late February: the markets' strength is encouraging more deals. So euphoric is the mood that even acquirers, usually penalised on the expectation that they will overpay, are seeing their share prices jump: Alcoa's rose by 8% on the day of its bid. To cap it all, Warren Buffett, not normally one to follow the crowd, says he would spend as much as $60 billion on the right deal—far more than the investor has ever forked out on a single acquisition.

This has inevitably led to comparisons with the 1990s merger boom. But there are several big differences. The most obvious is that the 1990s were fuelled by stock, whereas today's frenzy runs on credit. With interest rates low, it has become easier for companies to finance themselves with debt than with equity. Cash is the main coinage (see chart).


from another piece
Stockmarkets are today buoyed by a belief that LBO-bidders will swoop if share prices fall. It is known in the markets as the “private-equity put”, an echo of the “Greenspan put” in the late 1990s, when investors believed the Federal Reserve would always step in to save markets by cutting interest rates

>i have the feeling that the markets are/have priced in a "private equity call"!
>ich habe eher das gefühl das der markt einen "private equity call" eingepreist hat!

This trend has played into the hands of the big private-equity firms, which now lead a fifth of all takeovers, measured by value. They still have giant war chests to empty—the biggest funds are touching $20 billion in size—and are spending at a record pace. With such resources to hand, they are becoming bolder (some would say less discriminating). The average buy-out has tripled in size since 2005, to $1.3 billion. And taboos are being broken, as evidenced by the recent takeover of a utility and a bank, two industries previously considered immune to private equity.

Another difference is that this boom is broader-based than the last, both in terms of industry and geography. No single industry is far ahead of the rest, as telecoms and the internet were last time. Excitement surrounds financial services, metals and mining, power generation, property and consumer goods. And whereas the deals in the 1990s were concentrated in America, this time they are more evenly spread. In April twice as much was spent in Europe as in the United States.

Moreover, today's merger wave is driven not by enthusiasm for a nebulous “new paradigm”, but by global trends, such as demand for commodities, the globalisation of capital markets and the rise of budding multinationals in developing countries. Companies are using cheap funding as an opportunity to expand into new markets—hence the rise in the share of mergers that are cross-border, to a record 46% in the four months to April.

Reassuringly unfriendly
Today is more like the 1980s than the 1990s in another way, too: the hostility of the buyers. The dotcom era was nauseatingly cosy, with only 4% of deals struck in 2000 deemed hostile or unsolicited. This year the level is hovering close to 20%. ....


But the danger of overpaying clearly increases as competition for transactions heats up and stockmarkets scale new heights. There are signs that this is happening: the average premium being paid, when measured as a percentage of the target's cash flow, is higher that at any time since the bursting of the last bubble.

>ready for the hangover..../ der nächste kater kommt bestimmt........


Moreover, there are fears that mergers will be used to paper over cracks. Profit growth for companies in the S&P 500 will fall to 7% this year after several years of double-digit expansion, reckons Thomson Financial. Firms may join forces to hide their own deteriorating performance.

That should worry shareholders. For those who advise on deals, however, the bigger concern is what might bring the party to an abrupt end. A sharp economic slowdown in America? The collapse of a giant buy-out? A credit crunch with no clear trigger?

In private, most bankers say it cannot go on for much longer. In public, they will just keep clinking their glasses.