Greed trumps fear as banks arrange CLOs

In the Wall Street game of greed and fear, greed is once again asserting itself with Henry Kravis, Stephen Schwarzman and Leon Black.

After sticking banks with more than $300 billion of leveraged buyout debt, New York-based Kohlberg Kravis Roberts & Co, Schwarzman's Blackstone Group LP and Black's Apollo Management LP are raising money for collateralised loan obligations that will buy the assets for as little as 95 cents on the dollar.

Morgan Stanley, Citigroup Inc and their Wall Street competitors, which reaped a record $8.4 billion in fees from the buyout firms in the first half of 2007, financed at least seven private-equity CLOs in the past two months, while cutting off other managers, according to data compiled by Bloomberg. KKR officials said they accounted for about 40 per cent of the funds created since August.

"Private equity firms are such big repeat customers that they can demand investment banks" serve them, said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. "They'll say 'we're going to shut you out of future business if you don't give us what we want.'"

KKR Financial Holdings LLC, the publicly traded affiliate of KKR that invests in credit markets, raised two and started a third CLO in the past month from banks including Morgan Stanley, the second-biggest US securities firm by market value, US Securities and Exchange Commission filings show.

CLOs, a form of collateralised debt obligations, buy high- yield, high-risk loans and package them into new securities. The loans are typically rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.

Blackstone, Apollo
Schwarzman's Blackstone persuaded Citigroup, the largest US bank by assets, to do the same for a $570 million CLO, Bloomberg data show.

Black's Apollo funded the purchase of $1 billion in high-yield loans from Bear Stearns Cos at a discount, according to people familiar with the matter who declined to be identified because the terms haven't been disclosed. All of the firms are based in New York.

CLOs bought almost two-thirds of the debt that financed the record $616 billion of buyouts in the first half, helping reduce borrowing costs for takeovers, data compiled by S&P's Leveraged Commentary & Data show.

The average leveraged loan paid interest at 170 basis points more than the London interbank offered rate in May, compared with 229 basis points three years earlier, S&P data show. Three-month Libor, a borrowing benchmark, is currently 5 per cent.

CLOs Tumble
The collapse of the sub-prime mortgage market in July and August, and concern that a slowing US economy will cause corporate defaults to increase left banks with LBO loans and bonds they can't easily sell.

New CLOs tumbled to $68 billion since June, from about $127 billion in the first six months of the year, according to data compiled by New York-based JPMorgan Chase & Co.

CLOs now account for about 21 per cent of loan purchases, according to S&P.