Saturday, December 19, 2015

Altegrity Undone by Poor Quality & PEU Greed

WaPo reported on the USIS whistleblower settlement.  USIS had been owned by a series of private equity underwriters (PEU) since President Bill Clinton privatized government security investigations in the late 1990's'  The story stated::

665,000 cases had been dumped between 2008 and 2012. Internal documents “confirmed that USIS senior management was aware of and directed the dumping practices,” it asserted. The alleged motive was simple greed: “This practice was followed in order to meet USIS’s internal goals for completed cases and, therefore, to increase the company’s revenue and profits.”

The lawsuit cited emails from executives detailing the alleged practice, such as the one that proclaimed: “Shelves are clean as they could get. Flushed everything like a dead goldfish.”
PEU sponsored, PEU imploded.

And it documented how USIS raked in bonuses for turning around the cases quickly: $11.7 million between 2008 and 2010. A subsequent congressional investigation found that OPM seemed to be aware of the practice, and in 2011 staff members sent a letter to USIS’s vice president of field operation, asking him to explain how four investigators could have completed more than 13,000 reports — an average of 3,278 cases per employee — in one week.

At the time, USIS said the allegations did not reflect its core values
Quality matters not when the federal budget is a tool to push money to friends and political sponsors.

Sunday, December 13, 2015

PEU Business Shift a Chinese Parable.

Bloomberg reported:

Plastic Christmas trees had been the Kao family's great moneymaker for years when Francis Kao told his father in 2001 that things could only go downhill from there.

Overlooking their 10,000-worker factory, Kao pointed nearby to the newly built campus of up-and-coming Huawei Technologies Co. as the symbol of the future.

"The high-tech industry is right by your side, but you're still sticking to the status quo," Kao recalls saying to his father, Michael. "How can the workers you employ stay cheap and the company continue to be successful now that service companies are hiring?"

The next year, in a complex and controversial deal the Carlyle Group bought in, and the Kaos reinvented themselves.  "I have never regretted leaving the Christmas tree business," Francis Kao said.

Meanwhile, labor costs in China have more than quadrupled since the 2002 decision by the Kaos. Services eclipsed manufacturing in 2012 to make up the largest chunk of China's economy.

For Carlyle, the Boto purchase didn't fare well. It exited the business about 6 years after its investment after years of rising labor and raw materials costs.
Washington Business Journal reported on a new Carlyle fund focused on Asia.

The D.C.-based private equity giant The Carlyle Group(NASDAQ: CG) is opening up new investments in Asia with a fresh $235 million investment fund, according to recent Securities and Exchange Commission filings.

The Carlyle Asia Structured Credit Opportunities Fund-A LP was first formed on Dec. 5, 2014, but closed its year-long pooled investment funding round on Dec. 4, 2015.
The new fund will package corporate debt into securitizations.  What looks good one moment can look awful ugly later.  Let's hope Carlyle's fund avoids the Botos, the Kao's Christmas tree company Carlyle lost to receivership in March 2008, just days before Carlyle's Guernsey based $22 billion mortgage security fund collapsed.  There may be lessons for investors today in this PEU parable.

Corker's Refiled Financial Reports Back to 2007

WSJ reported:

Sen. Bob Corker failed to properly disclose millions of dollars in income from real estate, hedge funds and other investments since entering the Senate in 2007, according to new financial reports filed by the Tennessee Republican. 

Mr. Corker late Friday filed a series of amendments showing that his personal financial reports as originally filed included dozens of errors and omissions.
Corker put the blame on accountants, even though the duty to accurately file is solely his.  

“I am extremely disappointed in the filing errors that were made in earlier financial disclosure reports,” Mr. Corker said in a statement.
Maybe those poor filing errors will feel horrible for making Mr. Corker look bad.

It's another glimpse into our world of abysmal leadership, where no one takes responsibility, quality is an ancient notion and honor has been replace by greed.  Well done, Mr. Corker, another accountant has been vanquished. 

Carlyle's Rubenstein Reiterates Energy Attactiveness

Business Insider reported:

The energy sector is about to throw up a once-in-a-lifetime investment opportunity. 

That is according to David Rubenstein, the billionaire cofounder and co-CEO of the alternatives giant Carlyle Group.

"Maybe the greatest energy investing opportunities we've ever seen" lie ahead, Rubenstein said December 9 at the Goldman Sachs Financial Services Conference in New York. 

"Distressed debt is very popular right now."
Distressed debt is the way Carlyle might lose current energy affiliates, like Niska Gas

It's also the way Carlyle might backdoor takeover other struggling energy companies.

The Carlyle Group shifted to a loss in the third quarter, which Rubenstein blamed on a one day stock market drop.  Carlyle's energy sector losses are much deeper than a bad trading day. 

Despite teasing CNBC in March that Carlyle would buy energy, Rubenstein said that is yet to happen.

Carlyle has done a good job of biding its time, and said prices still haven't reached a bottom. West Texas Intermediate crude oil dropped below $37 a barrel on Tuesday.  "We're quite pleased with our willingness to hold back."
Carlyle's $9 billion in energy dry powder in March is now $10 billion. It will be interesting to see when and how that is put to work.

Saturday, December 12, 2015

Mutual Fund Run for PEU Bonds!

MarketWatch reported:

A high-yield mutual fund is blocking investors from withdrawing their money, in a rare and jarring move amid a severe downturn in below-investment-grade and distressed debt.

The move at Third Avenue Focused Credit Fund is intended to facilitate an orderly liquidation of the fund, which recently had $789 million in assets, down from more than $2.4 billion earlier this year.
Third Avenue Management's shareholder letter states:

"Investor requests for redemption, however, in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders."
Third Avenue's investment theory failed.  Here's their take:

When we launched FCF in 2009, we expected not only to add a differentiated product to our fund line-up which complemented our platform but would hopefully provide outsized returns in the credit markets, including investments in special situations. As the Fund grew over the years, we were able to find unique and special investments. Unfortunately, the present environment has harmed our ability to successfully implement that strategy.
Wow, how hard is it to say we made the wrong investments/bets in low grade corporate bonds?  Many private equity affiliates floated bonds to fund deals and special dividends for their PEU owners. 

A Bloomberg story showed another indicator of the current turbulence:

"...over the past two months as BlackRock Inc., Fortress Investment Group and Bain Capital closed hedge funds after running up losses."
It's an interesting time when the big money boys but no longer trust one another to make good on their debts or bets.  Panic, like greed, ain't pretty.

Sunday, December 6, 2015

Caesar's Bond Battle

Forbes reported on the two sides fighting over Caesar's Entertainment bonds and the legal ploys involved, which included a possible House amendment to tip the scales. Each side has a storied group of billionaires.

First lien holders include Brigade Capital Management, Aurelius Capital and the largest first lien holder, billionaire Paul Singer’s Elliott Capital Management; second lien holders include Howard Marks’ Oaktree Capital Management, Centerbridge Partners, Appaloosa Management and Tennenbaum Capital Partners.

The three biggest shareholders of the CEC parent are private equity backers Apollo (Leon Black) and TPG Capital (David Bonderman), and the nearly $20 billion hedge fund Paulson & Co. 
Alabama Senator Richard Shelby introduced a bill amendment that would have stacked the deck in favor of the PEU boys, Apollo, TPG and Paulson & Co.  

Paulson & Co. is the fifth-largest contributor to Sen. Shelby’s leadership political action committee for the 2016 election cycle, donating $52,500.
It's not clear how many Apollo or TPG affiliates support the Alabama senator.  Fortunately the amendment did not make the final bill, but the moves portend the PEU boys will seek the intervention of elected officials on specific deals.  

HuffPo spun the amendment as private equity trying to harm pension funds.  It all depends on which side of the bankruptcy the pension fund sits.  Do pension funds hold more junk bonds than private equity investments?  

It would be an odd time for elected officials to remove investor protections in the case of bankruptcy, especially given the expected wave of energy related implosions due to low oil and gas prices.  The PEU boys have long profited from politicians willing to serve their interests.  The failed amendment is but on step on that path.     

Recall that financial crises arise when the big money boys no longer trust one another to make good on their debts or their bets.