Deflationary Vortex
Tid bits with a hat tip to Jason Kelly at Bloomberg. As always, lots of Nattering love sprinkled in for good measure.
The Nattering One has mused before on how many LBO's & stock buy backs done with cheap borrowed money will "boomerang" on the investors.
The Nattering One muses... even worse, read below and just substitute the word "real estate" for "companies" or "investment", those with a functional brain will get the picture real fast...
Yesterday, Home Depot took an 18% haircut on the June sale of their construction supply unit.
The value of announced buyouts in June: $131.1 billion; July $87.4 billion; Aug 1 to 26th $18 billion.
Buyout firms relied on cheap debt in the past two years to finance the biggest deals of all time, often paying premiums of more than 30% for "companies".
Now, as the subprime mortgage meltdown rattles credit markets, firms will have to sell their "companies" to buyers who no longer have access to low-cost loans.
That will cut the sale prices of the "companies" and slash the buyout funds' returns.
Billionaire financier Wilbur Ross:
"When it comes time to resell these "investments", we'll likely be in a very different rate environment. The implications for returns could be substantial."
Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business:
"The severity of the drop depends on whether the U.S. economy flags further. Sluggish expansion, which crimps "companies" ability to pay back debt...
may push down annual returns to as low as 10% in the next three years. The question is how harsh it's going to be."
Scott Sperling, co- president of buyout firm Thomas H. Lee Partners: "These large payoffs will be much harder to get in coming years as the cost of credit rises.
"Prices for "companies" will need to adjust downward. Higher rates will definitely push toward lower returns."
The Nattering One has mused before on how many LBO's & stock buy backs done with cheap borrowed money will "boomerang" on the investors.
The Nattering One muses... even worse, read below and just substitute the word "real estate" for "companies" or "investment", those with a functional brain will get the picture real fast...
Yesterday, Home Depot took an 18% haircut on the June sale of their construction supply unit.
The value of announced buyouts in June: $131.1 billion; July $87.4 billion; Aug 1 to 26th $18 billion.
Buyout firms relied on cheap debt in the past two years to finance the biggest deals of all time, often paying premiums of more than 30% for "companies".
Now, as the subprime mortgage meltdown rattles credit markets, firms will have to sell their "companies" to buyers who no longer have access to low-cost loans.
That will cut the sale prices of the "companies" and slash the buyout funds' returns.
Billionaire financier Wilbur Ross:
"When it comes time to resell these "investments", we'll likely be in a very different rate environment. The implications for returns could be substantial."
Colin Blaydon, director of the Center for Private Equity and Entrepreneurship at Dartmouth College's Tuck School of Business:
"The severity of the drop depends on whether the U.S. economy flags further. Sluggish expansion, which crimps "companies" ability to pay back debt...
may push down annual returns to as low as 10% in the next three years. The question is how harsh it's going to be."
Scott Sperling, co- president of buyout firm Thomas H. Lee Partners: "These large payoffs will be much harder to get in coming years as the cost of credit rises.
"Prices for "companies" will need to adjust downward. Higher rates will definitely push toward lower returns."
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