Bridge loans: Banks fret as golden geese turn to turkeys

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Now to the main item . . .

Does it hurt to kick yourself while wearing a €450 pair of sneakers? Yes, the bankers who underwrote a €1.3bn leveraged buyout of Italian footwear brand Golden Goose will probably tell you.

A group of banks including Credit Suisse and Goldman Sachs agreed to finance the buyout by private equity firm Permira in a deal announced in mid-February. 

Back then, coronavirus was spreading fast in China’s Hubei province, Hong Kong was seeing empty supermarket shelves and a scramble for toilet roll, and the Mobile World Congress had been cancelled — but there were few cases in Europe. 

Little more than a week later, the situation changed drastically, with northern Italy — where Golden Goose is headquartered — becoming Europe’s epicentre of the virus outbreak and the frontline to contain its spread. 

Now, the deal (whose price tag DD called “eye-popping” at the time, at 14 times 2019 earnings) has become a symbol of heady dealmaking in better times. 

“It’s Italy, it’s Asia, it’s high-end fashion […] it ticks all the boxes. It’d only be worse if they owned an airline as well,” one banker said. Another financier was blunter, calling the deal a “golden turkey”. 

While it’s a relatively small headache for the banks that backstopped a €450m bridge loan for the deal, it’s a symbol of how the tide has turned on the leveraged buyout boom. 

The risk for banks is that, having agreed to backstop the debt initially, the turmoil caused by the pandemic leaves them unable to sell it to other investors. Then they’re stuck holding it, or have to shift it at deep discounts and take a hit to their balance sheets. 

That’s the focus of this analysis by DD’s Rob Smith and Kaye Wiggins here. 

Several other European deals are in the same stage of financing, including Advent and Cinven’s mammoth €17.2bn leveraged buyout of Thyssenkrupp’s lifts business (“At least you’ll have something decent to sell, but you are still losing money,” was one banker’s take). 

Then there’s £1.4bn of loans financing TDR Capital-owned Stonegate Pub Company’s buyout of rival UK bar operator Ei Group at a time when all pubs are closed, and nearly €700m of debt backing Lone Star’s acquisition of BASF’s highly cyclical construction chemicals business.

Meanwhile, people involved in the GG deal are putting on a brave face. Bankers hope online sales will hold up and demand will bounce back in Asia if the virus subsides there. Or, as the company put it in an Instagram post to promote its “rainbow” glitter sneakers: “The greater the storm, the brighter the rainbow.” 

Bridge loans: Banks fret as golden geese turn to turkeys

The trainers are famously sold pre-distressed. Let’s hope the company isn’t, too. 

Will they, won’t they induces hedge fund ‘arbageddon’

The playbook for a merger arbitrage fund goes something like this: 

Step 1: Look out for deal announcements

Step 2: Weigh up whether it will go through 

Step 3: Buy the stock* of the target (* the trades can be a bit more complex)

Step 4: Profit as the deal moves to completion

The OG value investor Benjamin Graham is said to have perfected the method and it’s largely considered to be a true and tested moneymaking strategy. (Warren Buffett, a Graham aficionado, did it for years. Here’s him talking about how crowded the trades had become in 1998.) 

Deal spreads — the difference between a target company’s current share price and the higher value of a takeover offer — move in tandem with whether traders think the transaction will go through or not. The more likely a deal is to happen the narrower the “spread”. 

Typically these trades are seen as relatively safe and returns are muted so to juice them up, portfolio managers will use leverage. 

But what happened last week, for many merger arb funds, was unprecedented. Deal spreads blew out as investors made a bolt for the exit, which left some funds nursing heavy losses during so-called arb-ageddon. 

HFR’s index of merger-arbitrage funds has tumbled 17.5 per cent so far in March, putting it on course for its worst month for at least two decades. 

Widening discounts, or spreads, can blow up the merger-arb trade by triggering margin calls from banks, forcing the arbitrageur to cut their losses.

But “arb-ageddon” isn’t necessarily an indication that traders think pending deals won’t go through. Spreads on the T-Mobile/Sprint merger widened with the rest of the market despite the fact that it’s almost guaranteed to close, one merger-arb PM told DD. 

It’s more nuanced than that. A lot of the selling has been done indiscriminately by hedge fund managers looking to save some skin, who don’t necessarily have a view on how the deals will pan out. Now, people are pitching long funds to snap up wide spreads as some hedge funds are sitting on the sidelines. 

To find out more about how the market meltdown has affected deals, check out the full story on “arb-ageddon” here.

SoftBank’s heavy debt load is weighing on the group

DD readers watching the credit default swaps market might have noticed a big move in one boldfaced name: SoftBank, the Japanese conglomerate whose bets on WeWork and other start-ups have recently faced a series of setbacks.

The derivatives, insuring against the risk of SoftBank missing debt payments, were trading above 500 basis points last week, jumping about 150 per cent from earlier in the month. 

Translation: credit traders have grown skittish about SoftBank’s more than $170bn total debt load in the middle of a coronavirus-led market meltdown.

Bridge loans: Banks fret as golden geese turn to turkeys

SoftBank chief executive Masayoshi Son, above, appeared eager to smooth over those concerns on Monday, announcing $41bn in asset sales to free up money for share buybacks and debt payments. 

Son claimed the move would result in “the largest increase in cash balance in the history” of SoftBank, sending shares surging without revealing which assets would be sold.

But doubters remain in the credit markets. As DD’s Miles Kruppa and Ortenca Aliaj reported, Leon Black’s Apollo Global Management hedge funds have taken a sizeable short position against SoftBank’s debt, calling out the company’s leverage and troubles at its $100bn Vision Fund.

Add in Paul Singer, whose Elliott Management is leading a campaign to improve SoftBank’s share price, and Son is facing down two of Wall Street’s most feared investors. 

Place your bets now.

Job moves

  • Occidental Petroleum has added two board members nominated by activist investor Carl Icahn. Andrew Langham and Nicholas Graziano, two close associates of the billionaire who has been agitating the company since he tried to block its $56bn takeover of Anadarko Petroleum last year, will join the board as part of a ceasefire. More here.

  • Deutsche Bank has nominated Deutsche Börse chief executive Theodor Weimer for its supervisory board, which puts him in pole position to succeed embattled chairman Paul Achleitner. More here. 

  • Siemens has named Roland Busch as its next chief executive, who will take over the reins from Joe Kaeser next year. 

  • Barclays has appointed Carrie Chen as vice-chairman of greater China banking and Sung-Min Chung as head of technology in banking for Asia-Pacific. Chen was formerly at Morgan Stanley while Chung joins from iTutorGroup.

Smart reads

An export most of Europe wants to buy One of Germany’s most successful exports in the times of coronavirus could be Kurzarbeit. Is it a car? A chemical? No. It’s a tried-and-tested policy tool, designed especially for such economic downturns, that will keep mass unemployment firmly at bay. (FT)

A vacuum at the top Ever heard of a streaming company called Tubi? Probably not. But Fox News boss Lachlan Murdoch was busy striking a deal to buy it while for two critical weeks hosts and guests on Fox branded the coronavirus an elaborate plot against Donald Trump and played down the threat of the deadly pandemic. Was putting the younger Murdoch at the helm a mistake? (NYT)

Inside the GAM scandal A Financial News investigation reveals the details behind Tim Haywood’s sacking at asset manager GAM, including information that an internal probe turned up about the bond trader’s alleged dealings with Australian financier Lex Greensill. (FN)

News round-up

US subprime mortgage specialist seeks buyers for $1bn of assets (FT)

Shell and Total slash costs and suspend buybacks (FT)

Endeavour to merge with Semafo in C$1bn mining deal (FT)

Wall Street’s retail ‘big short’ hits AllianceBernstein (FT)

LVMH says will not buy Tiffany shares on open market (Reuters)

As Wall Street empties, Asia’s bankers slowly head back to work (BBG)

Swedbank failings on €37bn of transactions revealed in report (FT)

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