Posted tagged ‘fire sale’

Bear Stearns: Notes and Predictions

March 17, 2008

Wow. What a difference a day makes. Bear Stearns is now, apparently, being fire-sold for $2 a share to avoid being fire-sold for the values of it’s assets minus it’s liabilities.

I was reading the WSJ piece on the topic, and it seems like there was a lot of pressure applied by the Fed to ensure Bear got sold, with no regard for shareholders (the article states this, in essence). So counterparty risk is now secure. Great! But wouldn’t it have been better to run a real process and determine the value of the company? Wouldn’t it have been more valuable to not send the message that the “health of the financial markets” is more important than a firm’s sale occurring at their true equity value? (And aren’t both of those, taken together, a contradiction? Mis-valued assets was how this mess got started.)  So, let’s make some bold predictions! I don’t think they will all be right, but they are obviously all reasonable to me. I’ll show my hand and give the probability I ascribe to the prediction coming true, as well.

Prediction: Lots of shareholder lawsuits. K.K.R. was looking a bidding, so was J.C. Flowers, and the Fed says the deal needs to be done today, so they get crammed out. Who do you sue? Everybody of course! Hence JPM estimates $6b in costs for this transaction, first item listed–litigation. Probability: 100% (Bonus prediction: Someone notable from Bear joins in a lawsuit or files one themself! Probability: 50%)

Prediction: The price gets raised. A process wasn’t run, shareholders will demand more, and the Fed is taking $30 billion in risk. For $1 billion in accretion to earnings, and not even being in the first loss position on the toxic assets Bear is holding, why pay such a low price? This will become a problem for JPM. Keep in mind, this can be raised (the pruchase price) by having to pay out certain shareholders more than the bid price. For example, employees they wish to retain might have shares made whole at a higher level than the sale (you have 40k shares of BSC, you get $40 in JPM stock for each share if you stay, for example). Probability: 70%

Prediction: JPM will never see some of those assets add to their franchise. If the prime brokerage business really saw the kinds of outflows reported by the media (from Bear, that is) JPM could already be finding itself over-paying for that asset. And the mortgage and securitization business at Bear? Management for that business are at the top of that market in terms of knowledge and relationships–watch that business experience brain drain quickly. Probability: 70%

Prediction: Integration will be a nightmare. Culture clash will occur at many points in the process and within many businesses. JPM and Bear’s cultures aren’t compatible. Bear is a very raw environment and is very cut-throat. You’ll see this get ugly, fast. Big names on both sides will leave and power struggles will be common. Perhaps this is normal merger behavior, but it will be worse because the Bear employee have already been financially destroyed. You’ll see resentment for JPM from ex-Bear employees and silos form within the firm. It will be difficult to interact with certain parts of the firm depending on where you worked when JPM bought Bear. Ouch. Probability: 60%

Well, that’s it for now. I’m sure much more information will leak out as this deal develops. If this drags on or lots of game-changing information comes to light, I might revisit these later.

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Who Still Credits the Suisse with being Neutral? Anybody? Anybody at all?

February 12, 2008

A story that has been a focus for the debt markets, specifically as it relates to (corporate) credit debt markets, is the fire sales by C.S. of its stake in Harrah’s without coordinating with other banks. Indeed there is evidence that this wasn’t the first time C.S. got creative. The interesting thing about this turn of events is that these syndicates are put together to share risk and broaden distribution channels (some banks talk to accounts that others do not). Well, with the C.S. shenanigans creating a fire sale, leaving Harrah’s new bonds 7-10 points (cents on the dollar) lower and the loans being offered 5-6 points lower (estimates, market participants are rather cagey, but low 90s dollar price for the loans and 88 cents on the dollar for the bonds was widely noted in the marketplace) it seems like they made a good sale. Complicating the situation, of course, is the fact that they seemed to have caused the panic that led to the downdraft. Add to this technical overhang the lack of help from C.S. in distributing the remaining debt, and the fact that a sizable buyer was taken out of the market. It’s plain to see that C.S. worked against the syndicate and hurt the distribution power of the group.

Further, here’s an interesting datapoint: C.S. was reported to have around $30 billion in LBO debt on its books, around 10% of the estimate of $300 billion total LBO debt out there. Let’s assume all of this is too high by half (although why would journalists stress an extreme figure in a headline, hmm?). That leaves C.S. with around $15 billion. If, including Harrah’s, they sold $5 billion (rounding up all numbers in the previous Deal Journal post) but caused a 5 point decline in the market (assume it’s all loans they hold, no bonds, which suffered a more severe price movement), they lost $500 million. The figure includes $250 million that was saved on the loans they had already sold (overestimating their savings, since they only really “saved” that loss on Harrah’s, other sales occurred earlier). Ouch. But the remaining unsold LBO debt shed $7.5 billion in value (5 points on $150 billion) due to the sale, and ensuing panic. It seems that letting C.S. into the syndicate did anything but mitigate risk.

Because this situation has wreaked such havoc, perhaps other shops will actually take a stand and block C.S. from future syndicated deals. Their actions seem to show they can be relied upon neither to mitigate risk nor aid in distributing any.