New York Times: Debt Linked To Buyouts Tighten The Economic Vice
Before the main story there is an excellent (but lengthy piece) in the New York Times 'From
Midwest to MTA, Pain from Global Gamble' which outlines some examples of the interconnections of the global finance eco-system; and current fallout. It actually parallels the exact same situation many individuals in America were faced the past decade - facing a shortfall in budget people "got creative" to fill the gaps - and "enablers" were ready, willing, and able to sell them the product to get them there. Granted the enablers are paid on volume of transactions only so if they blow up after the fact - who cares? No different than mortgage brokers the past half decade. It's a long story but thought I'd highlight it since it shows you how even local school boards were taking this gamble to make up for holes in their budget. And why I have been saying for the past year, that next budget year for state's is going to be a disaster (look for federal bailouts there too starting next summer)
- During the go-go investing years, school districts, transit agencies and other government entities were quick to jump into the global economy, hoping for fast gains to cover growing pension costs and budgets without raising taxes. Deals were arranged by armies of persuasive financiers who received big paydays.
- But now, hundreds of cities and government agencies are facing economic turmoil. Far from being isolated examples, the Wisconsin schools and New York’s transportation system are among the many players in a financial fiasco that has ricocheted globally.
But the main story I want to focus on is private equity which were about 18 months ago the new golden children - masters of the universe; the best, the brightest, the new power brokers in our era of cheap credit and looking the other way while they load the companies they buy in debt while running off with huge paydays. So for their self interest they are effectively bogging down company after company and threatening the jobs of many in this country. The fallout will be even more apparent in the current credit situation. I still to this day, on principle alone, won't buy Burger King (BKC) stock based on this story I read in BusinessWeek a few years ago (BusinessWeek - April 10: Where's the Beef?) I'm not the only one (Nov 19: Cramer Goes off on Private Equity) The irony is the IPO of Blackstone (BX) effectively put in the "top" in private equity. But let's see how the credit crisis is affecting our friends...
- Private equity firms embarked on one of the biggest spending sprees in corporate history for nearly three years, using borrowed money to gobble up huge swaths of industries and some of the biggest names — Neiman Marcus, Metro-Goldwyn-Mayer and Toys “R” Us. (That Mervyn's thing didn't work out too well - Jul 21: Add Mervyn's to our Growing Litany of Retailer's Heading to the Great Sunset)
- The new owners then saddled the companies with the billions of dollars of debt used to buy them. But now many of the loans and bonds sold to finance the deals are about to come due at the worst possible time. So, like homeowners with an adjustable rate mortgage that just went up, some of private equity’s titans are facing a huge squeeze.
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