Friday, April 11, 2008

Dirty Laundry

The New York Times reported today that Linens-n-Things (formerly LIN), taken private in Feb 06 by Leon Black's Apollo, may soon file for Bankruptcy. He didn't buy it particularly cheaply, given top-of-cycle retail sales, likelihood of rising import prices for sourced merchandise, the increasingly tapped-out consumer, and the fact that LIN wasn't THE category killer. OK, we all make mistakes, and in any event, this is hardly a flesh wound for Mr Black, despite the fact that if LIN does file, it will be the largest leveraged implosion of an LBO to-date in this cycle.

However Apollo Management is attempting to go public with a reasonable percentage of the proceeds going NOT to the company but to the selling shareholders. Mr Black and Apollo's management (lower case "m") it would see, are decidedly less bullish than they were a mere 24 months ago.

All which makes me think back 24 months to the repetitive horror of each business morning, when some short-seller's tucchus was smarting as yet another listed company was removed from public ownership at premium prices and with outsized leverage that made sense only to the most Panglossian of investors, and most bone-headed of lenders, or those able to pass-the-parcel wholesale quickly and efficiently. Alas, we are, apparently, on the cusp of real-value discovery in yet another area of finance, and this won't be pretty for anyone, no-sirree. Private equity funds, private-market loans and debt will sting banks, IBs and, indeed some large hedge funds with class-three assets.

Public-market "junk", and various distressed debt, on the other hand that has already felt the burning eyes and gravitational effects of price discovery upon spreads and last-sales, is much better value, offering trade-able opportunities intra-market to the equity, and within the debt capital structure of the firm. Just be certain to hedge your IR exposure, for this remains a potential bottled cork in a fizzy-drink should printing presses get rolling in earnest.


Byrne said...

I'm amused that so many of the large buyout shops are starting up distressed debt funds. Shouldn't we get suspicious that the mortuary is starting up a sausage factory?

"Cassandra" said...

I am uncertain about the analogy. For, the thing is, debt IS the correct place to be when purchased wisely in good enterprises. The caveat is of course that with PE firms shooting the moon and leveraging as much as they could, the difference between the veneer of equity and the most junior of debt are relatively insignificant. More concerning might be the potential conflicts of interest between their role as principal equity manager, and their potentially new-found role in championing the often diametrically opposed views of creditors. Robbing Peter to pay Paul (and themselves twice-over in the process) ? I would be concerned if I were an an equity investor in a PE fund swinging both ways, but then again, I think equity investors will themselves royally f*cked once things have settled where they may.