Scratch This

The 7-Year Itch of reliquifying $550 billion in levered loans from the 2003-2008 PE shopping spree is in full force. It needs to be medicated.


One of our key themes in 4Q09 was the ‘7-Year Itch’, the crux of which is that the spend-a-thon that occurred in the private equity world from 2003-2008 at peak valuations and peak margins needs to reliquify to save pro-cyclical buyers from their own bad bets. The tally is a frightening $550billion in levered loans that need to come to market.


Scratch This - 7 YEAR ITCH


With the Piggy Banker Spread (between 10s to 2s) near all-time highs, the average CEO just having seen their net worth pop by over 50% from a scary bottom, and the Mensa Society running our investment banks showing their propensity to dole out the big bonuses for performance that is grossly misaligned with what is needed for a healthy US financial system, it should not come as a shocker that deal activity is ripping.


Can you please quantify ‘ripping’ McGough?  Ok.

  1. We saw 90 equity offerings worth $40.2 billion come to market since 1/1/08.  Ironically, one transaction – Visa – accounted for 45% of this total. Excluding this, we’re looking at $22.3bn gross over 2 years.  A full 62% of that occurred since September, when ‘the most hated rally in history’ was a stone cold reality and the spread between 10s and 2s hitting all-time highs was acknowledged as the gift that it is.
  2. Aside from IPOs, we’re seeing stepped-up M&A activity. Heck, if you’re a banker, you get paid more on a merger/acquisition than you do an IPO – so why not?  Just this week we saw Walgreens buy Duane Reade. Not a lot of detail was given, but based on facts given, our analysis is getting us to a (levered) loss of about 45% for Oak Hill on the deal.
  3. Back in IPO land, now there’s talk of Toys R Us coming back to market. Dollar General is one of the biggest pigs thus far to don enough lipstick to switch hands. Toys R Us is bigger. We think Sports Authority will follow. We’re gonna need a lot more lipstick.

Scratch This - IPO COUNT vs SPREAD


But it’s not all positive, folks. In fact, over the past month, we’ve seen 15 IPOs and 16 debt offerings pulled. One of the more notable retractions is this morning’s announcement from Blackstone that Travelport is not ready for Prime Time (actually, they’d argue that Prime Time isn’t ready for them).


What is almost ready for prime time is a BX short, which has a broken TREND line on Keith’s models of $13.97. Stay tuned on that one.


Scratch This - BX


Brian McGough


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