Blackstone bonds: Steve Schwarzman is finessing the debt market — again. The Blackstone boss took advantage of the leveraged loan market’s boom to fund his LBOs at minuscule cost. Now his buyout shop has sold $600 million of bonds to tap the investment-grade market’s rally. But his new investors should do better than their unfortunate LBO loan market counterparts.
Schwarzman’s timing looks right. The investment grade market has rebounded dramatically. The yield on some of Blackrock’s bonds, for example, has fallen to around 5 per cent from more than 11 per cent late last year. Blackstone is slightly different, since it has an advisory business and typically makes a chunk of its earnings from volatile performance fees — although those have been scarce recently.
But creditors are viewing even banks with potentially volatile proprietary trading earnings as less risky too. The cost of insuring Goldman Sachs’ debt against default in the credit default swap market is about four times cheaper than it was just a few months ago. And Goldman, Blackrock and Blackstone all have similar credit ratings.
Blackstone’s liquidity position will be much stronger after the offering, which priced Thursday afternoon. The private equity firm currently has $785 million of cash, plus a $1 billion undrawn revolving line of credit. The new 10-year senior debt deal will extend its maturities and boost its coffers in case it wants to make acquisitions.
Of course, bond buyers should proceed with a degree of caution. Alternative asset managers can’t leverage themselves too much. Performance fees fluctuate dramatically. So investors should look instead to Blackstone’s very stable management fees when evaluating its credit.
Even so, Blackstone should have no problem with the debt. The bonds carry a 6.625 per cent coupon. That means Blackstone would only have to pay out 3 per cent of its 2008 management fees in interest, leaving it with a big margin of safety. Lenders to Schwarzman’s LBOs may have taken a beating as the leveraged loan market careened up and down over the past two years. But this time around, his new creditors should do better.
