Wednesday, March 4, 2009

The systemic risk brought about by the leveraged buyout bonanza (of income trusts).


This article (below) in today’s Globe explains why I opposed the junk bond leveraged buyout of BCE before the CRTC and the Supreme Court of Canada. A deal that had been approved by Jim Prentice as Industry Minister and a deal that had been only made possible by Stephen Harper’s killing of income trusts, thereby allowing a huge swath of Canada to be ripe for leveraged buyout....introducing needless and reckless systemic financial risk into our economy.

We have the intellectually corrupt policy makers in Ottawa, like Ex Goldman Sachs investment banker Mark Carney, and his fabricated arguments like tax leakage to thank for that, as well as his complete bias towards all things Wall Street groovy.......the sole source of the world’s present financial woes.

Globe and Mail
Boyd Erman

Kohlberg Kravis Roberts & Co.'s winning streak in Canada is over.


KKR founder Henry Kravis, a man whose name became synonymous with buyouts during the merger boom, made big money in Canada for years, buying and flipping household names like Shoppers Drug Mart Corp. and Yellow Pages Group Co. for big profits.

But the firm's final major acquisition in Canada, the debt-fuelled $2.7-billion (U.S.) takeover of Toronto-based door maker Masonite International Inc. at the height of the housing boom, ended in failure yesterday. Masonite said it will seek creditor protection to restructure because interest payments are sucking the life out of the company.

KKR will hand over Masonite to its lenders, and in return they will cut the company's debt from $2.2-billion to just $300-million. That will wipe out the $551-million investment Mr. Kravis's firm made in 2005. The move comes after KKR disclosed in November it had written off its stake in Air Canada's maintenance arm.

The losses in Canada are a big comedown for Mr. Kravis, who only two years ago came to this country and told a crowd in Halifax that private equity was in a "golden era."

The good times came tumbling down not long after, with the disappearance of cheap debt, followed by the economy's plunge into a sharp recession.

The problem for Masonite, like many private equity targets, was that KKR's acquisition saddled the manufacturer with too much debt.

With the U.S. home-building market cratering and taking demand for doors with it, Masonite was unable to keep paying the interest bill.

"It's still a good business - obviously hit hard by the cycle - it just had too much debt," said analyst Donald Marleau, who followed Masonite for debt-rating agency Standard & Poor's.

"That will probably be a theme for the rest of 2009."

KKR's troubles haven't been confined to Canada. KKR Private Equity Investors LP, a publicly traded fund that invests in the firm's buyouts, has been forced to write down assets around the globe.

The fund said earlier this week that its holding in First Data Corp., a U.S. credit card payment processor, is now worth 40 per cent less than it was on Sept. 30, 2008. The value of its investment in power producer TXU Corp. has slumped 30 per cent in that time. And the fund wrote off the remainder of its stake in Germany's biggest broadcaster, ProSiebenSat.1 Media AG.

In the case of Masonite, KKR came to the conclusion that there was little future in the investment as the financial options disappeared.

Masonite hasn't released final 2008 results yet, but revenue was on track to fall below $2-billion from highs of $2.5-billion in 2006 at the peak of the housing boom. As well, its cash reserves are dwindling.

The lenders who will own Masonite if the restructuring is approved, a group that includes a mixed bag of hedge funds and banks, are now said to value the company at about $300-million to $400-million.

"It's a very painful thing to do - but it's probably the right thing to do - to massively reduce the leverage so you don't have the short-term issues, because this business won't be able to service debt in its current state," said one person familiar with the discussions.

The restructuring is only financial, and Masonite doesn't need to cut any jobs or close factories, a Masonite spokesman said, though he added that could change if the economy worsens.

For Mr. Kravis, who was wrong about the "golden era" of his business, the focus now is on finding a new way to profit even as deals go bust.

One person involved in the talks suggested that KKR could even try for a second chance at Masonite by trying to buy the new stock in the restructured company from banks that don't want to hold it.

KKR declined to comment on the Masonite situation.

"All of us will have to adapt," Mr. Kravis told a private equity conference last month. "We have to change the way we do business. If we don't, we simply will be left out."

2 comments:

Kephalos said...

If Canada had a big-G and little-g governance system similar to the US, the BCE fiasco a criminal investigation would be underway to determine whether there was selling-buying of political influence and insider trading.

But not to give up hope. For years there was only one man in the US who reported Madoff as a fraud.

Perhaps there will come a day when Canadian prosecutors ask income trust investors to help build a case against certain persons in BCE, OTPP and the Federal Department of Finance.

Dr Mike said...

It will be tough building a case against these guys since no one wants to get involved .

Without CAITi & Brent Fullard , this issue would have been dead 2 years ago with nary a mention.

Even the Auditor General who is there to protect the people from gov`t mismanagement will not get involved.

Without Brent`s constant pushing , even the Liberal party would be on the sidelines.

Trust investors are like the proverbial "Private Members Bill" , interesting but of little consequence without the juice behind them.

We are after all , the people with no constituency thanks to the political system in this country.

We are trying to make certain changes but again no one seems to care.

Dr Mike.