Ambac Regulator Wins Support From Dunkin Brands on Plan
May 24, 2010 by Jim Coen
Filed under Brand News
Jody Shenn of BusinessWeek reports that Ambac Financial Group Inc.’s regulator won support from Dunkin Brands Inc., Sonic Corp. and Hertz Corp. as he seeks to overcome objections from some of the insurer’s clients to his plan to rehabilitate the second-largest bond guarantor.
Executives of donut retailer Dunkin Brands, drive-in restaurateur Sonic and car-rental firm Hertz, all of which issued Ambac-insured bonds, filed affidavits in support of Wisconsin Insurance Commissioner Sean Dilweg’s motion in state court yesterday opposing the legal bids by two groups of bondholders. Opponents of his plan said it would favor banks who bought default protection on one type of mortgage security.
“Aside from being factually wrong” in their allegations about the plan, Dilweg’s challengers should be turned aside because the commissioner “has broad discretion to decide how to best to protect policyholders and the public from the grave risks posed by Ambac’s deteriorating condition,” the department’s lawyers at Foley & Lardner LLP said in the filing.
Two months ago Dilweg forced New York-based Ambac’s insurance unit to split in two after its capital was depleted by projected losses on collateralized debt obligations tied to subprime mortgages, halting payments on $35 billion of other mortgage bond policies and additional contracts.
At the same time, Ambac reached a tentative agreement to pay $2.6 billion in cash and $2 billion of surplus notes to banks holding $16.5 billion of insurance on CDOs that was left in its main account. Surplus notes can be paid if the company has enough capital at some later point in time.
‘Substantial Collateral Damage’
“A rehabilitation of Ambac in its entirety could have substantial collateral damage in several facets of Ambac’s business,” Roger A. Peterson, a director in Wisconsin’s office of the commissioner of insurance, said in the filing. That could include requirements for borrowers such as Dunkin Brands to make accelerated payments on certain debt if Ambac were seized completely, he said.
Dunkin Brands Chief Financial Officer Kate Lavelle said in an affidavit that a failure of Ambac would result in a “very substantial restriction of operational cash available to” the donut company because of agreements related to a $1.5 billion “whole business securitization.”
The filing by the insurance department of Wisconsin, where Ambac’s insurance unit is based, also included affidavits by Sonic CFO Stephen C. Vaughn and Hertz Corp. Treasurer R. Scott Massengill.
Opposed to Plan
Policyholders seeking to block Dilweg’s plan include owners of residential mortgage-backed securities such as hedge fund firms Aurelius Capital Management and Fir Tree Partners and holders of Las Vegas Monorail Co. municipal debt such as mutual fund manager Eaton Vance Corp. The RMBS holders would receive 25 cents on the dollar in cash for their claims and the rest in surplus notes under his plan.
Their argument that they would get less than CDO holders isn’t accurate because the CDO settlement offers between 35.8 percent and 54.4 percent of projected claims, while mortgage- bond claims would be paid in their entirety, as they arise, when considering the surplus notes they would also receive, the department said, citing an analysis by BlackRock Inc.
CDOs package pools of assets such as mortgage bonds or high-yield company loans into new securities with varying risks.
Read more at: BusinessWeek
Policing Private Equity
Portfolio.com reports that regulators, subsumed with banks, hedge funds, and trading, have gone easy on private equity. Disciplining these funds is best left to institutional investors, anyway.
The private equity business is one of a handful of segments of the financial markets that isn’t emerging as a major focus for reform among Washington policymakers. True, there has been some discussion about taxing the industry’s profits at a higher rate, which is moving forward in the House in a proposal by Senator Carl Levin and Senator Max Baucus. But compared with the historic bank regulation that the Senate passed on Thursday, private equity funds and their managers have escaped the populist storm relatively unscathed, even if they will spend much of the next five years trying to refinance hundreds of billions of dollars of debt in a more difficult environment.
The probable reason for this relative immunity is that in their dealings with Wall Street investment banks, it’s more probable that it was the private equity world that took advantage of investment banks like Citigroup or Morgan Stanley rather than the other way around.
Indeed, within investment-banking circles, the biggest buyout shops—Blackstone, KKR, and Apollo—earned a reputation for playing one investment bank against another in quest of the cheapest and largest financing packages. At one point during the height of the frenzy, bankers at Citigroup were trying to find ways to finance a $85 billion buyout, several times the largest such deal ever done, on behalf of one of its clients. “We might have temporarily lost our minds,” admitted one of the bankers involved, after the fact. “But at the time, we knew we couldn’t afford to lose the client’s loyalty.”
Still, just because the private equity business seems to have manipulated Wall Street rather than the other way around doesn’t mean that it should be immune to scrutiny. True, its investors are sophisticated entities—pension funds, college and university endowments, and foundations. Many of them may have been encouraged by the success of early players like Yale’s David Swenson (and the latter’s loud cheerleading for such alternative asset classes) into committing extremely large chunks of their portfolios to the relatively illiquid private equity arena. The appeal was easy enough to understand. At the height of the private equity boom, top quartile firms generated an annualized return of 39 percent, according to the Private Equity Council, an industry group.
A survey last year by Prequin calculated that two out of every five of the largest endowments have allowed or encouraged their allocations to private equity to exceed their targets, signaling a dangerous lack of discipline on the part of those institutions. But that wasn’t because Wall Street misinformed or concealed the true nature of the risks or return characteristics of private equity from these investors, as numerous legal actions now claim was how Main Street homeowners ended up refinancing their homes with toxic mortgages or German banks invested in CDOs.
On the contrary, the terms of the deals being struck by buyout funds at the height of the bubble often were spelled out in newspaper headlines. It was all too clear that these often involved miniscule amounts of equity investment and massive debt loads.
It’s not surprising that those chickens are coming home to roost. In March, Moody’s Investors Service released a much-buzzed-about report, one that aroused the ire of the private equity world from the very first sentence: “Nearly half of U.S. nonfinancial corporates that defaulted in 2009 had private equity sponsors.”
In other words, those debt loads were making it difficult for the companies that had been buyout targets to function and repay that debt in a recessionary environment. One after another well-known companies filed for bankruptcy protection, staggering under the burden of debt loads applied to their operations by new private equity purchasers: Linens ‘n Things, Reader’s Digest Association, Tribune Co. (the publisher of Chicago’s broadsheet daily newspaper.) The bigger the buyout, the more perilous the outcome, Moody’s said, and the debt rating agency pointed to high correlations between low-rated debt issues and defaults, and between buyout-backed companies and low-rated debt issues.
The Moody’s report, coupled with others from the Boston Consulting Group and Standard & Poor’s—all suggesting that the pain isn’t yet at an end—have been met with furious ripostes from those inside the buyout world. The issue under debate appears to be the precise definition of a default: Moody’s lumps negotiated settlements and prepackaged bankruptcies into the default category, while other studies (including one sponsored by the Private Equity Council) argue that it’s inappropriate to include transactions in which bondholders received significant “recovery” levels on their investments.
That strikes StreetWise as debating over how many angels are capable of dancing a creditable flamenco atop the proverbial head of a pin. Rather than debating whether recovering 80 cents on the dollar means a bond didn’t technically default, the private equity industry might well start spending some time revisiting its basic model and questioning its relationships not with Wall Street (which will always bend over backwards to accommodate such lucrative clients) but with their own investors and the management of their portfolio companies they acquire.
Rubenstein: No $10 Billion L.B.O.’s Anytime Soon
While David M. Rubenstein thinks happy days for private equity are coming again, he says one shouldn’t bet on seeing the mega-buyouts of yesteryear return anytime soon.
Mr. Rubenstein, the Carlyle Group founder, told Bloomberg Television in an interview on Thursday that many of the elements are in place for a recovery in the leveraged buyout industry. But the big deals from the golden age remain highly unlikely: “If you want to do a $10 or a $20 billion buyout, I think that’s unrealistic in this day and age right now.”
Watch a video of the interview:
Mr. Rubenstein said that private equity firms are benefiting from the re-opening of the debt gates, giving him and his competitors access to the financing they need to do deals again. Companies are more willing to consider deals at more seller-palatable prices, too.
Still, some aspects of private equity deal-making remain harder. Debt remains more expensive than before and carries more covenants, or restrictions. And private equity firms are forced to increase the amount of equity they will put into an L.B.O.
NY Times
DDIFO Editors Note: The Carlyle Group, is one of three private equity groups that own Dunkin’ Brands.
The Mysterious Case of the Missing $3 Trillion
The New Risk: Securitization
Suzanne McGee writes at Portfolio.com that the financial crisis has changed the way people think about risk. At the end of every three-month period, data providers crunch through a mountain of information about stock and bond deals, M&A activity, and all kinds of other financing to produce the much-scrutinized “league tables.” And the final weeks of December were no exception, as Jody Drulard and his team at Dealogic LLC scrambled to put together a summary of Wall Street’s dealmaking for the watershed year of 2009.
But instead of looking at what Wall Street firms had done in 2009 (notably, a big rebound in debt issuance that earned $18.2 billion in fees for investment banks and banks globally), Drulard found himself pondering what wasn’t showing up on the league tables he was compiling. Specifically, that missing $3 trillion or so of capital that Wall Street had raised every year for most of the first decade of the 21st century.
“Really, what’s happened is that about 25 percent of the capital markets fundraising activity has just evaporated,” says Drulard, managing director of Dealogic. “The securitization market had $2 trillion of capital raised every year for six years or so; another $1 trillion once raised in the loan market is gone as well. If that’s the ‘new normal,’ that’s got to be worrying for Wall Street.”
Folks like Reed Auerbach, head of the structured transactions group at the law firm Bingham McCutchen, are already feeling the impact. Back in 2006, at the peak of the market, partners and associates at McKee Nelson (the predecessor firm, of which Auerbach was co-CEO) were toiling away to put together three or four securitizations or more every working day. “It was like a machine,” Auerbach says. Last year? Bingham McCutchen, which merged with McKee Nelson last year, is still No. 1 in terms of the number of securitization deals it helped put together. But it worked on only 114 transactions in 2009, down from 1,100 or so in 2006.
To some extent, the ebullient bond market masked some of the pain for financial institutions last year, as companies raced to take advantage of relatively low rates and rapidly recovering investor interest to issue a record $2.78 trillion. Even junk-bond issuance soared to $175.6 billion, triple 2008 levels and within 10 percent of the 2006 issuance record. And Drulard figures that underwriting new debt and stock issues will continue to keep Wall Street’s bankers busy in 2010. “But securitization and lending have been very important products; for Wall Street to be healthy again, they need to come back.”
It isn’t just Wall Street that will suffer. Over the last decade or two, financial institutions have come to rely on the ability to securitize a chunk of the loans they make in order to manage their risk. And when banks were reluctant to lend, non-bank financial institutions did so, knowing that they could resell those loans to investors through Wall Street’s securitization machine. As is now all-too-well known, that machine got carried away in the years leading up to the 2008 credit crunch and the near collapse of the financial system.
Read more at: The New Risk: Securitization
Other related stories at ddifo.org: Dunkin’s Brouhaha
Why Does Dunkin’ Donuts Lobby The Federal Reserve?
Arthur Delaney writes in the The Huffington Post thagt financial firms have long lobbied the Federal Reserve, high-minded maker of monetary policy. But the Fed’s foray into lending during the financial crisis this year has opened it up to lobbying from niche industries like recreational boat manufacturers, rental car companies, and — Dunkin’ Donuts?
Indeed. Dunkin’ Brands, parent company of Dunkin’ Donuts and Baskin-Robbins, began lobbying the Fed in the second quarter of this year, according to lobbying disclosure reports filed with Congress.
The New York Times reported in June that economists were uneasy with the Fed’s role as a credit allocator, because decisions to favor one industry or another can be seen as political, and the Fed is supposed to be insulated from such pressure.
The number of special interests that reported lobbying the Fed shot up from 102 to 143 from the second to third quarters of 2008, as the Fed prepared to announce its Term Asset-Backed Securities Loan Facility (TALF), which lends money to investors who buy asset-backed securities from lenders in order to keep credit flowing to borrowers. When it was announced last November, the program was for securities collateralized by student loans, auto loans, credit card loans and loans guaranteed by the Small Business Administration. The program officially launched in March, and was expanded to include commercial mortgage-backed securities in July.
So what does Dunkin’ want from the Fed, exactly?
In a statement to the Huffington Post, Dunkin’ Brands emphasized the fact that its franchises across the country are small businesses, and said its lobbying is on behalf of its franchises and “our nation’s entrepreneurial spirit.”
“While financing is still available for strong brands such as ours, for the small business community as a whole, gaining access to credit has been challenging and this has limited opportunities for entrepreneurs to go into business for themselves,” said Cicely Simpson, top lobbyist for Dunkin’ Brands. “On behalf of our nation’s entrepreneurial spirit and in honor of our more than 2,200 franchisees, Dunkin’ Brands has engaged in conversations with the Federal Reserve, the Administration, and Congress to ensure that they are aware of the credit needs of small business owners.”
Simpson was not made available for a conversation, but LobbyBlog wanted to know more. What exactly was on the table during Dunkin’s conversation with the Fed — Donuts? Ice cream?
Joking aside, economists queried by LobbyBlog confirm that there is, in fact, something funny about Dunkin’ lobbying the Fed.
Read more at: The Huffington Pos
