Friday, June 21, 2019

Explosions at Carlyle Group's Philadelphia Refinery

Three explosions rocked Philadelphia Energy Solutions (PES) refinery early this morning.  Philadelphia Inquirer reported:

A series of explosions ripped through a refinery in South Philadelphia early Friday, lighting up the night sky and triggering a massive fire.
Gasoline prices rose in the aftermath of the blaze.

Wholesale gasoline prices surged 3.7 percent Friday in New York on speculation that the PES outage might curtail regional fuel supplies.
PES went bankrupt in early 2018, after The Carlyle Group loaded the company with debt used to pay Carlyle massive dividends.  Carlyle tried to take PES public in August 2015 but low energy prices derailed the IPO.

Seeking Alpha explored the bankruptcy and was puzzled by the refinery's agreement with its former rail terminal, which received millions in public funding.

The Carlyle Group spent $175 million in 2012 to acquire a two-thirds stake in PES Holdings, but in return it had to obtain full operational control of the company. PES Holdings was in desperate need of a capital injection at the time in order to upgrade its operations and stay relevant in the refining space.
Under new management, PES Holdings spent $100 million building a rail terminal to receive Bakken crude and $30 million upgrading that facility. By 2015, North Yard Logistics LP was spun off and Carlyle Group decided to buy a stake in the spin-off.
So Carlyle was in full operational control and on both sides of the logistics deal, which it too planned to take public.  Investors don't want to buy a company that has an at risk revenue stream.  Carlyle shored up logistics revenue for North Yard/PES Logistics Partners:

North Yard Logistics LP signed a minimum volume agreement with PES Holdings, where PES agreed to take in 170,000 barrels of oil per day for ten years through that terminal. PES would pay North Yard $1.95 per day to load and unload those barrels, which is equal to a quarterly minimum payment of $29.835 million or an annual payment of almost $120 million. Loading and unloading fees above that volume would be only $0.51/barrel. There were also inflation escalators built into the contract.

During the first half of 2014, the rail terminal's utilization rate was nice and high at 91%, but that was back when it only had 140,000 bpd of capacity.

Various SEC filings provide different capacity figures, as PES Logistics Partners noted that the rail terminal's capacity was going to be increased to 210,000-240,000 bpd, while Energy Transfer Partners LP noted that capacity was going up to 280,000 bpd. It comes down to what types of trains are carrying the crude across America, newer trains means the terminal can offload larger volumes of crude per day.

PES Holdings' utilization of that rail terminal dropped precipitously from 2015 to 2017. Recently, its utilization rate has moved below 30% as PES has only been shipping in 58,000 bpd through the rail terminal. PES still has to pay $120 million per year to North Yard, but that will probably change post-bankruptcy.
PEU Report noted Carlyle's reliance on train shipped oil in early 2015.  Within nine months the picture changed and PES relied on African oil delivered by ship.

PES turbulent PEU ownership isn't over.  Carlyle lists the company as a current holding and promotes its ownership via a value creation video.  As in the case of nursing home giant ManorCare. Carlyle's value can be someone else's destruction.

Update:  ZeroHedge reported on the fire but missed the Carlyle Group ownership connection.

Monday, June 17, 2019

PEU View from Ground Floor

Twice I've worked for a private equity owned healthcare company.  The first time was in the early 1990's and the second started a year ago when the same private equity underwriter (PEU) obtained majority ownership of my employer (alongside another PE firm). The two experiences were night and day.

In the early 90's I received regular raises and bonuses.  I met one of the principals of the PE firm at a national meeting.  He seemed personable.  I had no concept of private equity.  I just knew we were privately owned and I bought stock in the company in our initial public offering (IPO).  Today that company's debt is rated CCC by Standard and Poors.

In the last year the same private equity firm oversaw the destruction of our office.  Turnover soared to over 50%.  Our new owners cut the number of holidays by 25% and reduced holiday pay by 33%.  They installed unreliable cloud technology and implemented time wasting software which also underpaid employees.  They cut 10% of the workforce as Christmas and New Year's approached.  Our office space was cut in half when they moved us to another location.  Management exhorted us to grow in the midst of this chaos.  Oh, and my first raise in years amounted to a paltry 0.5%.

The company grew EBDITA by over $50 million during this time.  The principal I met in the 90's is still with the firm.  He no longer seems personable.  Greed ruined a once great local provider.

The PEU virus is now epidemic in healthcare and I directly witnessed its devastating symptoms.  I'm not sure our healthcare system can recover from PEU toxicity.

Update 6-19-19:  ZeroHedge ran a piece on the managerial elite enriching themselves via complexity and obfuscation,  Author Charles Hughes Smith sees healthcare as a failed system that will bankrupt the nation.  His view echoes that of Dr. W. Edwards Deming who once called rising healthcare costs one of management's seven deadly diseases.

Saturday, June 15, 2019

PEU Erskine Bowles Helps Gobble Whataburger!

Dallas Morning News reported:

Whataburger, the beloved burger chain with a 69-year family legacy in Texas, has sold a controlling interest in the company to Chicago-based investment banking firm BDT Capital.
Crunchbase had this to say about BDT Capital Partners:

BDT Capital Partners is a private equity arm of BDT & Company.
Whataburger will be PEU owner come fall.  BDT Capital has New York roots.  Founders Byron Trott worked for Goldman Sachs and William R. Bush for Fulbright Jaworski.  An April 2009 press release stated:

William (“Bill”) Bush, is retiring from Fulbright after more than three decades to join BDT Capital Partners, a merchant bank based in Chicago, Illinois, that will invest in and advise family and entrepreneurially controlled or influenced companies. Bill will serve as a founding partner and General Counsel of BDT Capital Partners, along with founder and managing partner Byron Trott, formerly of Goldman Sachs. 

PEU Erskine Bowles is Senior Advisor and non-Executive Vice Chairman of BDT Capital.  Bowles founded Carousel Capital and served on Morgan Stanley's board until February 1, 2018.  Morgan Stanley advised Whataburger's founding family on the sale.

Its employees work on all aspects of a business and serve both in advisory and investment roles. 

BDT recently bought a stake in WhistlePig Whiskey. reported on other holdings:

BDT has majority shares in Dunkin’ Donuts, Krispy Kreme, Panera, Einstein’s, and others. BDT also has majority shares in competing coffee companies, like Peet’s Coffee & Tea, Caribou Coffee, and Sara Lee’s coffee.

The Chicago Tribune reported in 2017 that BDT also had shares in Intelligentsia, Lou Malnati’s pizza chain, and Athletico Physical Therapy.
I hope Whataburger employees have a better PEU ownership experience than my health care coworkers.  That's a topic for another story. 

Monday, June 10, 2019

It's a PEU World: 30,000 Foot View

Over half of U.S. companies are owned by private equity underwriters (PEU) according to FT.  Milken Institute researchers published "Companies Rush to Go Private" in August 2018.  Michael Milken is considered the founder of leveraged buyouts which morphed into private equity.

Private equity owned/backed companies are much smaller than their public counterparts.

The PEU model initially loads affiliates with debt, deal fees and annual management fees.  It often adds another layer of debt to pay its sponsor (the PEU) a special dividend/distribution as well as more deal fees.

Workers have seen their wages stagnate as PEU ownership spread like a toxic chemical spill.  The billionaire class which is widely represented in the PEU community received the economic benefits while workers did not. 

The period from the black line to today corresponds with the time frame from the first graph showing how private equity underwriter owned firms became ubiquitous.

Adding debt initially and over time is a signature PEU move.  Micheal Milken was known as the Junk Bond King before he was convicted and sent to jail.  Junk bonds are less than investment grade and carry a concern that they will be paid off.  The concern can rise to whether their next interest payment will be made.

Forbes reported on record issuance of B3 rated bonds and the concern they may default in an economic downturn.

The Financial Stability Oversight Council met May 30th to discuss this very possibility.  The Street,com headline read:

The Financial Stability Oversight Council, a panel of top U.S. regulators charged with preventing future financial crises, met Thursday to discuss the past decade's surge in corporate borrowing, much of it by companies with junk-grade credit rating. An economic downturn likely would bring a wave of credit-rating downgrades and debt defaults that could ripple across markets.
The Board heard public testimony/feedback on the issue.  The PEU boys submitted a report defending their industry as safe and solid.

It read like Carlyle Group co-founder David Rubenstein's 2006 sales pitch for Carlyle Capital Corporation.  CCC was the canary in the coal mine, imploding in March 2008, six months before Lehman Brothers fell..

Federal Reserve Chair Jay Powell sees potential corporate debt defaults as a recession amplifier but noted times are good in a House of Representatives report on leveraged lending.  Powell worked for The Carlyle Group for eight years. 

Rest assured the PEU boys have something to sell and they want the little investor to buy.  The Milken report offered:

Regulations that segregate investment opportunities, and exclude large groups of investors from profitable investment opportunities have severe consequences that include worsening the distribution of wealth. Such exclusionary practices raise thorny social justice issues regarding whether all investors should have equal access to investment opportunities.

However, as more companies are owned by PE funds in which households cannot invest, social policy questions about the fairness of maintaining an unequal distribution of investment opportunities need to be addressed. Moreover, legislation that mandates listed companies to meet more social and wealth distribution objectives that are not directly related to the operations of the company, likely will incentivize even more delistings from stock exchanges and exits into private ownership. This, in turn, likely will exacerbate the unequal distribution of investment opportunities and worsen the already skewed distribution of wealth.
There is always a final mark.

Update 6-11-19:  Nearly half of Americans (43%) cannot afford the basics of life.  Regulators are concerned about junk loans and their possible default.  "When the credit cycle finally does turn, UBS estimates investors in junk bonds and leveraged loans could lose almost a half-trillion dollars." (Bloomberg)

Update 6-16-19:  The top one percent of Americans gained $21 trillion in wealth since 1989 while the bottom 50 percent lost $900 billion.


Sunday, June 9, 2019

Rahm Joins Rubin at Centerview

Former Obama Chief of Staff and Chicago Mayor Rahm Emanuel will join Centerview Partners.  In his senior counselor role Emanuel will establish a Chicago office for Centerview.  Crain's Chicago Business reported:

The long-time Democrat decided not to seek a third mayoral term last year, after several decades in the political sphere, including as a senior adviser to President Bill Clinton, a three-term U.S. House representative from Illinois and chief of staff to President Barack Obama. After he left the Clinton White House, Emanuel was a Chicago-based investment banker with Wasserstein Perella for two years through 2000.
Emanuel will work alongside former Treasury Chief Robert Rubin, also a Senior Counselor for Centerview Partners.  Rubin joined the firm in 2010.

Rubin and his successor, Lawrence Summers, pushed for several policies that benefited Wall Street. The most significant were thwarting an attempt to regulate financial derivatives and repealing the Glass-Steagall Act, which separated commercial and investment banking.
Emanuel made $18 million in two and a half years working for Wasserstein Perella.   Politico noted:

Emanuel turned big Democratic donors and others he’d met during his White House years into clients for Wasserstein Perella, a firm that was led by Bruce Wasserstein, a hefty financial supporter of Clinton.
One of Centerview's co-founders, Robert Pruzan, worked at Wasserstein Perella.  Pruzan and Blair Effron founded Centerview in 2006. 

Emanuel's mentor Bruce Wasserstein died in 2010.  Vanity Fair reported:

This is the same Bruce Wasserstein who deprived the state and city of New York of some $75 million in capital-gains taxes (12 percent of his capital gain of around $625 million) when he claimed to have moved his residence to London in 2001, after he had sold Wasserstein Perella to Dresdner Bank.
Rahm will be reunited with Rubin, the man who helped break the world.  It sounds like the premise for a horror movie. 

Emanuel is a brawler. He’s legendarily tough and effective and ruthless. He's the type of guy who makes enemies, then makes lists of his enemies, then makes lists of his enemies’ friends, then makes lists of how they’ll pay.

Emanuel picked up a knife and called out the names of different politicians who had “f–––ed us.” After each name, Emanuel would cry out, “Dead man!”—and stab the knife into the table.
Jerk Rahm joins the man who ramped up risk to benefit the greed and leverage boys.  Apparently $18 million isn't nearly enough for retired politicians and their financial backers.  Emanuel has more brawling to do.

Thursday, May 9, 2019

Milken History for Younger Generations

Zerohedge reported on the interview with an interesting question:

Q:  "Why do younger generations seem to be losing faith in the free enterprise system?" -- Host Michael Milken
A:  "This is an entire (group of people) that don't know history." --  Ken Griffin
They may not know Cold War history but they lived through a significant financial event.  The young adult generation were children during the 2008 economic crisis.  They could sense the stress their parents, family, community and our society experienced during that crisis.  President George W. Bush and his advisors were clearly rattled and mobilized trillions ($) to save Wall Street. 

Conference host Michael Milken was part of an earlier economic crisis, one handled by President George H. W. Bush.  Before we enter that period of history consider Milken's bio which states:

Between 1969 and 1989, he revolutionized capital markets by pricing and rewarding risk more efficiently and democratizing access to capital. He financed thousands of companies that collectively created millions of jobs.
Had Mr. Milken achieved his claim he would not have gone to jail nor would the federal government have to bail out the Savings and Loan industry.  Consider his history:

The NYTimes reported in 1990:

Savings and loans played a central role in the development of the junk bond market, and many of Mr. Milken's largest clients were savings institutions that invested heavily in junk bonds underwritten by Drexel. In the rescue legislation signed by President Bush last summer, savings and loans were required to sell their junk bond holdings by 1994. The junk bond market has since collapsed, and institutions are having trouble unloading their holdings.

Last fall Drexel pleaded guilty to six criminal charges that described Mr. Milken as being at the crux of schemes which allowed the firm to cheat a client, trick a corporation into being taken over and manipulate the marketplace. In early February, faced with mounting financial pressure, Drexel collapsed and is now liquidating.

The move that led to Mr. Milken's downfall was his decision to provide hundreds of millions of dollars in financing to Mr. Boesky's stock trading corporation. Because Mr. Boesky was betting on takeovers, many of which Drexel put together, the relationship was viewed on Wall Street as questionable if not a clear conflict-of-interest.

According to the Government charges against Mr. Milken, Mr. Boesky was frequently called by the financier and instructed on investments to make. Those instructions were intended to benefit Drexel, sometimes to the disadvantage of the firm's clients.
That does not sound like pricing risk more efficiently or democratizing access to capital.  For his criminal deeds Milken paid a $600 million fine and was sentenced to ten years in jail.

Judge Wood said the former financier had to be sentenced to a long jail term to send a message to the financial community, and also because he chose to break the law despite his advantages of position and intelligence.\
"When a man of your power in the financial world, at the head of the most important department of one of the most important investment banking houses in this country, repeatedly conspires to violate, and violates, securities and tax laws in order to achieve more power and wealth for himself and his wealthy clients, and commits financial crimes that are particularly hard to detect, a significant prison term is required," she said.
Milken served 22 months.   Congress estimated in 1992 a $215 billion cost to clean up the Savings and Loan Crisis.  The report said this amounted to $800 for every man, woman and child in the U.S.  

The full extent of Mr. Milken's wealth has never been publicly disclosed. But he is expected to remain a very rich man despite the fine,
Reformed crook Michael Milken helped democratize government bailouts for the financial industry while maintaining his ill begotten gains.  He is the poster child for the private equity underwriter (PEU) class.  The greed and leverage boys believe unconstrained free markets (with significant government subsidies) are the solutions to all of America's ills.

The younger generations know this not to be true.  It's in their lived childhood experience.  The older generation should know better but greed is an tantalizing, unrelenting taskmaster.    

Sunday, April 28, 2019

Carlyle to Pull $1.35 Billion Out of PPD

Arabian reported:

Hellman & Friedman LLC and Carlyle Group LP are seeking to take as much as $1.35 billion of cash out of drug research company Pharmaceutical Product Development LLC. 

The firm’s private equity owners are seeking approval from some of PPD’s creditors for the dividend plan, according to people familiar with the matter. To fund the payment, PPD is mulling the sale of a risky type of junk bond called PIK toggle that allows a borrower to delay interest payments, said the people, asking not to be identified discussing a private matter. 

The plan to take cash out of PPD - one of the largest providers of outsourced clinical research whose clients have included GlaxoSmithKline Plc and Pfizer  - comes at a particularly turbulent time for the health care sector.  

In this case, the debt would be issued by PPD’s holding company, ranking it below most of PPD’s existing borrowings and one step further removed from the company’s assets, the people familiar said. 
Affordable healthcare is the public's biggest worry and has been for decades.  Private equity underwriters are ubiquitous in healthcare and have added significant costs to the system. 

Carlyle Group and Hellman & Friedman acquired PPD in 2011, in a deal valued at $3.9 billion. The Abu Dhabi Investment Authority and Singapore’s sovereign wealth fund GIC joined as minority investors in 2017 as part of a recapitalisation that valued the company at more than $9 billion
Greed lives and elected officials cater to the PEU boys and their insatiable longing for more money, power and influence. What's another $1 billion among friends?

Update 4-30-19:  Pitchbook ran a piece on the proposed $1.4 billion dividend Carlyle plans to suck out of PPD.

(PEU Report noted Carlyle's original purchase of PPD and it's strange 2017 deal.  Other PEU PPD pieces can be found here.)