Thursday, June 30, 2011

HCA's Legal Contingencies

HCA's recent 10-Q stated:

The Civil Division of the Department of Justice (“DOJ”) has contacted the Company in connection with its nationwide review of whether, in certain cases, hospital charges to the federal government relating to implantable cardio-defibrillators (“ICDs”) met the Centers for Medicare & Medicaid Services criteria. In connection with this nationwide review, the DOJ has indicated that it will be reviewing certain ICD billing and medical records at 87 HCA hospitals; the review covers the period from October 2003 to the present. The review could potentially give rise to claims against the Company under the federal False Claims Act or other statutes, regulations or laws. At this time, we cannot predict what effect, if any, this review or any resulting claims could have on the Company. 
 A New England Journal of Medicine study found the use of these devices somewhat questionable.

The Contingencies section also referred to qui tam or whistleblower investigations:

Certain of our individual facilities have received government inquiries from federal and state agencies and our facilities may receive such inquiries in future periods. Depending on whether the underlying conduct in these or future inquiries or investigations could be considered systemic, their resolution could have a material, adverse effect on our results of operations or financial position. 

If someone knew the timing of any suits, they could make a lot of money shorting.

Dunkin' IPO Pricing: Premium or Discount?

Dunkin' Donuts IPO could get a price range next week, after which the company will begin its investor presentation tour.  Private equity underwriters (PEU's)  Carlyle Group, Bain Capital and Thomas H.Lee Partners own Dunkin'.  They are selling a fraction of their shares inn hopes of raising $400 million.

Ironically, a Dunkin' parent may soon go public.  The Carlyle Group's IPO is expected to follow Dunkin's.   Dunkin' is the latest in a long line of Carlyle monetizations.

Dunkin's revised S-1 addressed a recent tax loss.  One might expect this to be an IPO blemish.  Not so, as private equity underwriters (PEU's) hate paying taxes.

Net income for fiscal year 2010 included a $62.0 million pre-tax loss on debt extinguishment primarily associated with our November 2010 refinancing transaction
Did that qualify for an Obama stimulus tax break for firms buying back debt for pennies on the dollar?

PEU's milked Dunkin' for $3 million a year in management fees:

The Company is charged an annual management fee by the Sponsors of $1.0 million per Sponsor, payable in quarterly installments. The Company recognized $3.0 million of expense per year during fiscal years 2010, 2009, and 2008 related to Sponsor management fees, which is included in general and administrative expenses, net in the consolidated statements of operations. At December 25, 2010 and December 26, 2009, the Company had $500 thousand of prepaid management fees to the Sponsors, which were recorded in prepaid expenses and other current assets in the consolidated balance sheets.
Carlyle, Bain or Thomas Lee investment funds may hold Dunkin' debt:

At December 25, 2010, certain affiliates of the Sponsors held $70.6 million of term loans, net of original issue discount, issued under the Company’s senior credit facility. The terms of these loans are identical to all other term loans issued to lenders in the senior credit facility.
While the loan terms are the same as other investors, what price did sponsor affiliates pay for Dunkin's debt. Was it pennies on the dollar?  Sponsors can retire debt owned by their investment funds.  Profits from cheap debt retirement could be a second ringing of the register in Carlyle's profit-palooza.

This is an interesting PEU disclaimer:

Our Sponsors have a controlling interest in our Company as well as several other entities. The existence of such common ownership and management control within business and other transactions could result in differences within our operating results or financial position than if the entities were autonomous. There have been no significant transactions with companies under common control during the periods presented.

In March 2006, we entered into an investor agreement with the Sponsors and also entered into a registration rights and coordination agreement with certain shareholders, including the Sponsors. Pursuant to these agreements, subject to certain exceptions and conditions, our Sponsors may require us to register their shares of common stock under the Securities Act, and they will have the right to participate in certain future registrations of securities by us.

Other noteworthy revelations include:

1.  Dunkin's filing addressed lawsuits against franchise holders, a source of $4.3 to $12.3 million in contingent liabilities.

2.  It also charges corporate overhead to its advertising funds:

To cover administrative expenses of the advertising funds, the Company charges each advertising fund a management fee for items such as facilities, accounting services, information technology, data processing, product development, legal, administrative support services, and other operating expenses, which amounted to $1.5million and $1.4 million for the three months ended March 26, 2011 and March 27, 2010, respectively. Such management fees are reflected in the consolidated statements of operations as a reduction in general and administrative expenses, net.
3.  Sponsors know the value of management fee cash flow, given Dunkin's prepaid such fees:

At March 26, 2011 and December 25, 2010, the Company had $500 thousand of prepaid management fees to the Sponsors, which were recorded in prepaid expenses and other current assets in the consolidated balance sheets.
4.  The management fee will be terminated for $14 million.  Sponsors will get money for five years of service not provided, yet this cash handoff will reduce Dunkin's tax liability.  Did I mention PEU's hate paying taxes?

Get your Dunkin' shopping cart and head to the IPO aisle.   You may have to wait for the price.

Update 7-1-11:  Dunkin's IPO may raise $500 million vs. $400 million, a 25% increase in proceeds.  It's not clear if this prospect is due to better pricing, more shares or puffery.

Update 11-2-11:  Carlyle and company charged Dunkin Brands for terminating their management fee. "In connection with the completion of the initial public offering in August 2011, the Company incurred an expense of approximately $14.7 million related to the termination of the Sponsor management agreement."

Wednesday, June 29, 2011

BOA Settles Countrywide MBS

Bank of America annouced a $8.5 billion settlement for resident mortgage securities issued by Countrywide.  Their press release stated:

Bank of America Corporation today announced that it has reached an agreement to resolve nearly all of the legacy Countrywide-issued first-lien residential mortgage-backed securitization (RMBS) repurchase exposure, representing 530 trusts with original principal balance of $424 billion. 
BOA's partners in crime stand to gain from the deal.

The 22 investors that have committed to support the settlement include many of the major U.S. and foreign institutional investors in RMBS:

  • AEGON USA Investment Management LLC.
  • Bayerische Landesbank.
  • BlackRock Financial Management, Inc.
  • Federal Home Loan Bank of Atlanta.
  • The Federal Reserve Bank of New York's Maiden Lane entities.
  • Goldman Sachs Asset Management L.P.
  • ING Investment Management L.L.C.
  • ING Bank fsb.
  • ING Capital LLC.
  • Invesco Advisers, Inc.
  • Kore Advisors, L.P.
  • Landesbank Baden-Wuerttemberg and LBBW Asset Management (Ireland) PLC, Dublin.
  • Metropolitan Life Insurance Company.
  • Nationwide Mutual Insurance Company and its affiliate companies.
  • Neuberger Berman Europe Limited.
  • New York Life Investment Management LLC.
  • Pacific Investment Management Company LLC (PIMCO).
  • Prudential Investment Management, Inc.
  • Teachers Insurance and Annuity Association of America.
  • Thrivent Financial for Lutherans.
  • Trust Company of the West and its affiliated companies controlled by The TCW Group, Inc.
  • Western Asset Management Company.
Other financial Masters of the Universe could be hidden under:

The settlement with The Bank of New York Mellon (BNY Mellon), the trustee for the RMBS trusts covered by the settlement, is supported by a group of major institutional investors represented by Gibbs & Bruns LLP, and is subject to final court approval and certain other conditions. 
Who holds the remnants of Carlyle Capital Corporation and how might they stand to benefit from the BOA settlement?  Let's hope it's not the DBD's, Carlyle's billionaire founders.

Carlyle Group Theorist David Rubenstein

Pensions & Investments interviewed Carlyle Group co-founder David Rubenstein.  Rubenstein is the public face of Carlyle, which is important given the private equity underwriter's (PEU's) looming IPO. 

Our theory is if the public markets go down by X percent, we go down by less. Public markets go up by Y percent; we go up by more because the theory is that private equity is better than the public markets. If it weren't, people wouldn't invest with us, right? So, what happened was when the private markets went down, a lot of people were nervous about their stocks and a lot of people were nervous about their private equity valuations. 
Rubenstein's theory has been tested since Fall 2008.  He could've shared data on public vs. private returns, but chose not to.  He failed to mention ten investments Carlyle lost to bankruptcy or lawsuits by former investors.

In other words, why would somebody invest in private equity? Why would somebody do that? The reason to invest in private equity is not because the founders of these firms are so charming and good looking, right? It's more that investors have looked at these statistics and they have seen over one, five, 10, 15 and 20 years private equity returns overall have outperformed public equity but not so much so that you would contort your life to go into private equity. It's only the top-quartile funds that so dramatically outperform the public market returns that people spend an enormous amount of time trying to figure out, “How do I get into the top-quartile funds?”

The "outperformance" isn't dramatic.  What percent of private equity returns are less than public market?  Is it one third, one half?

One failure of a theory requires its reexamination and possible revision

Knowledge is prediction.  My theory is Rubenstein offered puffery, which eventually works against his IPO sales pitch.  Private is better than public.  That's why private Carlyle is going public, so the PEU can be worse?  At least he's got his snake charm and slithering good looks.

Exceptional Ben Bernanke

Fed Chief Ben Bernanke creates system exceptions wherever he goes.  They range from The Federal Reserve supporting foreign banks to bypassing airport security, where ordinary citizens are radiated or felt up.  Bernanke walks unimpeded past the throng, narrowly avoiding a 95 year old woman having to remove her adult diaper for agents.  Ben gets to keep his on, should he be wearing one.

What new system will the Fed Chief create as America moves to self-boarding gates?  Will he get a personal escort onto the plane, as fellow passengers get cattle prodded or have the door slam in their face for being slow?  Bernanke sits in the section of the plane that still offers food, enjoying a a glass of Chablis, pistachios and the comfort of a warm wet hand cloth (the kind that would've helped the 95 year old woman).

Surely Carlyle Group's ARINC programmed in something special for VIP's like Ben.  Carlyle grew from $3 billion to over $106 billion under management in a decade by catering to the wealthy and connected.  Ben Bernanke will get more exceptions.  Everybody else gets a diaper, which may need to be removed  if soiled.

Friday, June 24, 2011

Carlyle to Buy Pension-less RAC

The Carlyle Group aggressively markets its investment offerings to underfunded pension funds.  Carlyle co-founder David Rubenstein frequently cites 30% annual returns from its various funds.  Rubinstein recently attended an open house for a Korean pension fund, the fourth largest in the world.  The Korean fund expressly wants the advice of private equity underwriters (PEU's).

However, Carlyle Group affiliate pension funds can be a different story.  Take Carlyle's $1.6 billion deal for RAC, a British roadside emergency service.  Reuters reported:

Carlyle sees the possibility of growing the RAC's roadside rescue business, Britain's number two behind the AA with more than 7 million members, and running it more efficiently, the first person said.

"There is also strong longer term potential to grow the business by investing in new and innovative financial services offerings such as motor and household insurance," said Andrew Burgess, a managing director at Carlyle.
The Carlyle Group loves products the government needs or forces citizens to buy, like motor insurance.

Carlyle's buyout comes with the usual debt load (62%) and management fees.  But RAC's pension didn't make the move.

Aviva will retain RAC's underfunded pension scheme, seen as a potential sticking point for any deal. The scheme had a deficit of 160 million pounds at end-December and, on completion, Aviva will make a one-off contribution of 67 million.
Will Aviva invest RAC pension money in a Carlyle fund?  Could it invest in the fund conducting the RAC deal?  That would be twisted for RAC employees with frozen pensions, having their retirement dependent on their pension freezer?

Twisted to benefit greed addicts, it's the PEU way.  Carlyle plans to raise over $1 billion from a September IPO.  That money will help Carlyle's co-founders rise up the billionaires list.  Thank heaven, their retirement is set.

Update 6-27-11:  Rubenstein spoke on pensions to Pensions & Investments.

Update 7-18-11:  Carlyle can lever RAC more without lender approval according to Private Equity News. 

Update 12-5-11:  Aviva will sell pension assets to improve the insurer's capital position.  No word on how RAC's pension, not taken by Carlyle, will fare in the move.

HCA to Profit from Federal EHR Money?

HCA reported it expects $290 to $340 million in Medicare/Medicaid incentive Electronic Health Record (EHR) payments.  This is up from $275 to $325 million projected in HCA's 10-k.  That's an extra $15 million.

It projects $115 million to $140 million of EHR operating expenses.  It didn't mention capital outlays associated with electronic health records.  At first blush, it looks like HCA is making money off Uncle Sam, at least $150 million in 2011.

Thursday, June 23, 2011

Vanguard Follows HCA as PEU IPO

Blackstone Group's Vanguard Health Systems followed KKR's HCA to the New York Stock Exchange.  Both companies own for-profit hospitals and captive insurance divisions.  Blackstone bled Vanguard and KKR/Bain Capital drained HCA for debt-funded dividends, a common private equity underwriter (PEU) move. 

Vanguard priced well below range at $18 vs. $21 to $23.  It took major discounting to entice investors.  Did dividend bleeding make up for Blackstone's 26% haircut? 

Vangiard and HCA hospitals are not considered "tax exempt facilities" under health reform.  Their PEU owners get preferred carried interest rates, at least until tax reform. 

Carlyle Vectoring in South Florida

Two stories dealt with Carlyle Group affiliates in South Florida.  The first came from South Florida Business Journal

Urgo Hotels, a major operator, developer and owner of upscale hotels, has acquired two landmark Miami Beach properties for $26.7 million in a joint venture with The Carlyle Group.
The Real Deal noted plans to upgrade the Blue Moon's and Winterhaven's restaurants to signature level.  Brazilians with bazillions to spend can stay in Carlyle's properties, dine extravagantly, and sleep luxuriously.  In the morning they can venture out to another Carlyle affiliate for coffee, Dunkin' Donuts. 

Dunkin' is expanding more than waistlines in South Florida:

Franchisee Marc Weinstein is opening the first new Dunkin' Donuts location in South Florida in some time, with plans for another eight to 10 locations in the next few years.
Good times are back in South Florida, thanks to foreign money.  Carlyle, a politically connnected private equity underwriter (PEU) has a Brazilian investment fund, so it can read imported coffee leaves.

Only one source mentioned deal financing, Hotel News Resource:

Jordan Ray, managing director of Mission, represented Carlyle and Urgo, placing the debt with a super-regional bank reentering both the lending market and the Florida market after a long hiatus. “This deal underscores banks’ interest in lending to premier sponsors again,” Ray said. “We were pleasantly surprised by the interest from regional banks in this transaction. It certainly expands our clients’ options prospectively for both acquisition and renovation projects.”

Might that super-regional be Carlyle affiliate BankUnited? Likely not.  BankUnited's PEU profit targets may prevent offering financing attractive to PEU's.  Is "PEU Bank" an oxymoron or a conundrum?

Carlyle's Montana Infrastruction

Private equity underwriters (PEU's) claim they're the answer to America's crumbing infrastructure.  The Obama administration feels likewise.  Deals range from roads, bridges, ports, water, sewer, airports,

The Carlyle Group's bid for Missoula, Montana's city water company provides valuable lessons, as did Chicago's parking deals.  How high will water rates soar?

Billings Gazette reported:

The Public Service Commission, which regulates utilities in Montana, also said the Carlyle Group should discuss its plans to become publicly traded and how those plans might affect future operation of Missoula’s Mountain Water Co.

PSC staff has asked the Carlyle group what investment returns it expects and receives on five other companies within its infrastructure fund, which plans to buy Mountain Water’s parent company.
Carlyle's response is at least twofold.  It had Mountain Water challenge the Public Service Commission's authority to review and approve the sale.  Then it asked that any information it shared be held confidential.

The PSC voted to issue a “protective order” that will prevent public disclosure of sensitive financial information that Carlyle is providing to the PSC while the agency reviews the purchase of Mountain Water.

Commissioners and their staff said the information is a legitimate trade secret, is needed to evaluate the purchase, and won’t be provided to the PSC without the protective order.
Carlyle's target is happy to sell water to government clients.
During the fall of 2000, Mountain Water acquired the system at Fort Missoula, serving businesses such as the Forest Service, Historical Museum, Army Reserve, National Guard, and Bureau of Land Management.
Carlyle wants the government to kick in cheap financing to make deals doable.  Also, it expects regulators to carve out monopoly zones for infrastructure projects.
Yet, financial information is a trade secret?  Only in a PEU world.  Does that mean Carlyle's looming S-1 will self destruct after reading?

Update 6-30-11:  Mountain Water lost its challenge.  The Public Service Commission will hold a hearing on the sale in late September.

Update 10-20-13:  Carlyle purchased Mountain Water and pulls $2 million in management fees and overhead cost from locals on an annual basis.  

Wednesday, June 22, 2011

$300 Billion Korean Pension Fund Goes Wall Street

Korea Joongang Daily reported:

Korea’s National Pension Service, the world’s fourth-largest pension fund manager, today is opening an office in New York City, its first overseas location.

“The New York office will establish a close network with global pension funds and institutional investors, collect market information to discover new investment opportunities, and take various roles to raise the NPS’s international competitiveness,” said Jun Kwang-woo, chairman and chief executive officer of the NPS.

The list of invitees is a who's who of PEU's.

About 150 bigwig financial figures will attend an opening ceremony tonight at the New York Palace Hotel, including NPS Chairman Jun, Citi Group CEO Vikram Pandit, Blackstone Group CEO Steve Schwarzman, Carlyle Group CEO David Rubenstein and JP Morgan Private Bank CEO Mary Erdoes. The event will be an attempt to cement a global network of financial experts to help NPS diversify its international investments.
 Nearly $300 billion in NPS assets will attract a crowd.  WSJ reported:

The NPS is also looking for higher returns overseas and has been particularly active in foreign real-estate purchases for a few years. Last year it spent around 2.6 trillion won on real-estate and infrastructure in several countries, including the 180 billion won purchase of a 12% stake in the U.K.'s Gatwick airport and a $1 billion deal with Kohlberg Kravis Roberts & Co. to buy a 23.44% stake from Chevron Corp. in Colonial Pipeline, the largest refined-products pipeline in North America.

The interest in energy dovetails with a key concern for South Korea, which imports most of its energy and competes with large resource-hungry countries like China and India for energy assets. South Korea, Asia's fourth-largest economy, plans to have 30% of its oil and gas imports in 2019 come from its own assets overseas, compared with 9% in 2009.

For this year the NPS plans to invest a total of $10 billion overseas, of which $6 billion will be in equities and fixed-income securities and $4 billion in alternatives.

The  $4 billion in alternative overseas assets includes infrastructure investments, with several possible investments in the U.S.  Will they pair up with PEU's or go their own in bidding on infrastructure deals?  I bet the former, given the invitee list.

PEU's High Finance with HCA

A former Bloomberg reporter contacted me in regard to private equity underwriters (PEU's) and health care.  HCA came up, including Bain Capital and KKR's dividend bleeding.  The PEU pair, along with founding Frist family members, stuck HCA for $4.25 billion in dividends/distributions prior to taking the company public. 

Bloomberg's current report on HCA's capital structure reveals:

Total assets -- $23.8 billion
Total liabilities -- $34.6 billion
Shareholder equity -- negative $10.8 billion

Who lends to a homeowner who owes more on the house than its value?  What Wall Street firm would float that deal?  Here's the crew that packaged and marketed $3 billion in debt in November 2010.  It financed HCA's payola to owners.. 

Bank of America Merrill Lynch
Barclays Capital
Citigroup Global Markets Inc
Credit Suisse
Deutsche Bank Securities Inc
Goldman Sachs
JP Morgan
Morgan Stanley
Wells Fargo Securities LLC

This exact same group handled HCA's independent public offering in March 2011.  Did double deal fees, from the debt offering and IPO, help Wall Street avert their eyes to HCA's burgeoning debt load?  Here's who got IPO proceeds:

Hercules Holding II LLC, an affiliate of Bain Capital, certain HCA directors and executives
It could be summed:  "HCA floats debt for owner's dividend.  Register rings a second time for for owners and executives in IPO."  It's greed junkie heaven.  All in a "God's work" day. 

What can the average citizen learn from this?  If your house is underwater, find a realtor to borrow from.  Pocket half the borrowing.  Then use the realtor to sell the house in stages, while pushing back payment obligations.  It's the PEU way.

Tuesday, June 21, 2011

Carlyle's RushCard Investigated for Hidden Fees

Hip Hop Wired reported:

Subpoenas have been issued to Russell Simmons' Rush Card and four other prepaid card companies by the Florida Attorney General's office who is investigating whether the card companies are forcing their users into paying hidden fees on every purchase.

The Carlyle Group invested in RushCard in August 2010.  Funding from Carlyle and Accel Partners enabled UniRush to launch the RushCard.  New investors would clearly understand the pricing model and profit potential.  While Carlyle doesn't like to comment on fees, legal or illegal, it does make its profit expectations clear.  That can drive spurious behavior by affiliates, bribing, betting, etc.  It's all such a rush.

Update 10-20-15:  RushCard locked out many of its poor users who are now unable to feed their families or buy gas to get to work.  Last Sunday a technology upgrade went awry and many RushCard users have had no access to their money since.   How can they get access to the crumbs from Russell Simmons or David Rubenstein's table? 

Rubenstein Returns to Seward's Folly

Carlyle Group cofounder David Rubenstein cited the need for Alaska to start an investment fund to attract development.

Alaska is going to need to help itself (with development). U.S. leaders as a whole need to recognize the importance of the Arctic for resource development and economic strength, said David Rubenstein, co-founder of the $107 billion global asset management company, the Carlyle Group, and husband of Alaska Dispatch publisher Alice Rogoff.

The U.S. needs to do much more "to get us in the game," Rubenstein said, noting that Russia has become the major player in Arctic. The U.S. would do well to cooperate with Russia when it comes to developing the Arctic, he said.

The state, currently flush with surplus revenue thanks to high oil prices, could use its wealth to create an "Arctic sovereign fund," attracting investors, especially if it provided incentives and favorable terms, Rubenstein said.

"Alaska can't wait for the federal government," Rubenstein said. "It needs to do some things on its own."
A likely source is the $40 billion Alaska Permanent Fund.  Rubenstein scours the world looking for government funds, regulatory preferences, direct subsidies and tax advantages.  Rubenstein helped make Libya's Gadhafi a stand up guy, while investing part of the Libyan Investment Authority's $35 billion.

Three years ago, Rubenstein encouraged Alaskans to line up at the federal till.   Now he wants Alaskans to create a till of their own, with maybe a few billion from the Permanent Fund.  A former lawmaker cited how the fund would help:

"One of the problems Alaska has had is the dearth of capital for projects and trying to explain Alaska to Outside investors is exceedingly difficult."
Funny, Carlyle's Rubenstein knows Alaska extremely well, profiting on the backs of Alaskan natives.

In 1984, a law was passed allowing native corporations in Alaska—that is, Eskimo owned companies created by Congress to manage native lands—to sell their losses to businesses looking for tax write-offs. The Marriott executives, working with David Rubenstein at Shaw Pittman, discovered the Eskimo clause and vigorously bought the losses to offset gains. The adventure has become known in some quarters as the Great Eskimo Tax Scam.
This history is ignored by America's private equity underwriter (PEU) fawning society.  Numbers have to make sense to PEU's, i.e. government subsidies, otherwise multibillionaires pull the plug.  Someone has to guarantee their 30% annual returns.

Monday, June 20, 2011

HCA's PEU Health Care Costs

KKR and Bain Capital took HCA private in 2006, the deal financed mostly by debt.  This added over $1.5 billion in additional interest expense per year.  Add management fees of roughly $120 million per quarter and the private equity burden grew to $2 billion per year.  Over five years this totals $10 billion.

Private equity underwriters (PEU's) milked HCA via special dividends, $4.25 billion worth prior to their independent public offering in March 2011.   Debt financed much of a $2 billion dividend payout, adding future costs to the health care system.

The dividend, HCA's third this year, will go to private-equity investors, including KKR  and Bain Capital,  It will be financed through the sale of $1.5 billion in junk debt maturing in 2021 and the use of HCA credit lines. 

That makes $15 billion dollars in higher health care costs from KKR and Bain's ownership of HCA.

How is the public exposed to PEU associated costs and dividend bleeding?  Medicare and Medicaid comprise 62% of HCA's admissions and 55% of revenue.  Medicare cost reports have over 650 categories of interest expense and categories for capital interest expense allocation.

Two states, Texas and Florida, comprise over half of HCA's admissions and revenue.  Texas is the wild west for health care, with the highest number and rate of uninsureds in the country.  Nearly one in four Texans have no health insurance.

Medicaid helps with the burden of the uninsured by providing federal matching funds through the Upper Payment Limit (UPL) program.  HCA gets nearly $700 million a year in UPL funds according to SEC filings.

Texas and Florida are responsible for 62% of HCA's uninsured admissions.  Imagine if those could be turned into paying HCA patients.  That's why Chip Kahn, head of the for-profit hospital lobby, the Federation of American Hospitals, joined with Bill Clinton in an all out push for PPACA.

SEC filings produced two other tidbits on HCA.  The company pushed back nearly $3 billion in debt from three offerings.  They pushed a $600 million debt back four years, $540 million six years and $1.84 billion five years.

HCA is also under investigation by the IRS:

At March 31, 2011, we were contesting, before the Internal Revenue Service (“IRS”) Appeals Division, certain claimed deficiencies and adjustments proposed by the IRS Examination Division in connection with its audit of HCA Inc.’s 2005 and 2006 federal income tax returns. The disputed items include the timing of recognition of certain patient service revenues, the deductibility of certain debt retirement costs and our method for calculating the tax allowance for doubtful accounts. In addition, eight taxable periods of HCA Inc. and its predecessors ended in 1997 through 2004, for which the primary remaining issue is the computation of the tax allowance for doubtful accounts, were pending before the IRS Examination Division as of March 31, 2011. The IRS Examination Division began an audit of HCA Inc.’s 2007, 2008 and 2009 federal income tax returns in 2010.

Our liability for unrecognized tax benefits was $402 million, including accrued interest of $92 million, as of March 31, 2011 ($413 million and $115 million, respectively, as of December 31, 2010).

Depending on the resolution of the IRS disputes, the completion of examinations by federal, state or international taxing authorities, or the expiration of statutes of limitation for specific taxing jurisdictions, we believe it is reasonably possible our liability for unrecognized tax benefits may significantly increase or decline within the next 12 months. However, we are currently unable to estimate the range of any possible change.

For-profiteers have a history of pushing the envelope on reimbursement.  I expect that to ramp up with Medicare's extrinsic motivation schemes.  HCAHPS and Accountable Care Organizations will generate creative behavior in reward obtainment.  While many will do so honestly, a significant number will lie, cheat or steal to garner the prize.   Nearly thirty percent of corporate executives backdated stock options over a decade long period.    Surely doctors, nurses and hospital administrators are as smart as their public traded counterparts.  In the case of HCA, corporate executives are doctors and administrators.

Greed, the ceaseless drive for ever expanding profits, and extrinsic motivation systems will interact in disturbing ways.  Obama's Commerce nominee John Bryson oversaw fraud as SCE's CEO, requiring a $148 million settlement.  The widespread P4P push leads me to believe fines are an expected new revenue source for the government. 

The government needs to find revenue given PEU's don't like paying taxes.  HCA owner, KKR had this to say in their 10-k:

The U.S. Congress has considered legislation that would have in some cases after a ten-year period, precluded us from qualifying as a partnership or required us to hold carried interest through taxable subsidiary corporations.

Congress was willing to let private equity skate on a ten year phase in on carried interest.  2020 is about the time America is supposed to have legal citizens covered by health insurance.  How many nonprofit community hospitals will be forced into tax paying entities, i.e. for-profiteers?  How many PEU health care companies will be flipped and how many times between now and 2020?  Rest assured, 30% annual returns won't bring health care costs down.  It will produce billions in dividend bleeding and management fees.

PEU's aren't the answer.  Neither is deforming pay for performance, the win/lose kind.  Greed addicts dangling punishment by rewards will combing in disturbing ways.  We must be in some sort of sleep walk...

Update 6-21-11:  HCA announced it would buyout the nonprofit ownership in Colorado's HealthOne for $1.45 billion.

Update 11-29-21:   Bain Capital ended up raking in a stunning $1.2 billion off an initial equity investment of $64 million in HCA.  

Update 3-23-23:   HCA charges new nurses huge training fees if they leave before their contract commitment.  Some call it indentured servitude. 

Sunday, June 19, 2011

Carlyle in Running for St. John of God's Pathology

St. John of God may follow Caritas Christe Health System in selling out to a private equity hell hound.  St. John's, an Australian hospital system, did not deny putting its pathology division on the blocks.  Bidders include The Carlyle Group's Healthscope.  Australian Business with WSJ reported:

"We estimate a price over $300m could still be about 2 per cent to 3 per cent earnings per share accretive for both Primary and Sonic (Healthscope competitors)," said Citi analyst Alex Smith.
The article mentions pathology's high fixed costs, which become higher after a sale due to additional interest, depreciation and amortization costs.  This move won't lower health care costs, but it may help Carlyle achieve targeted 30% annual returns.

St. John of  God was granted the vision of the infant Jesus.  His most famous miracle involved rescuing inmates from a fire in the Grand Hospital at Granada, with John passing through the flames unscathed.

Centuries ago saints walked through the fires of hell saving people.  Today, Wall Street bankers and private equity underwriters (PEU's) claim to do God's work. They walk unsinged through fires of raging health care costs, even as they add billions in interest expense, management fees and special dividends.  Neither the U.S. or Australian government minds for-profiteering in health care.  Their policies encourage its widening.

Safety net hospitals, I mean "tax exempt facilities," have a brutal three years until 2014.  That's PPACA's PEU pathology.  In the meantime For-Profiteers will do their part to drive up health care costs.  In contrast to St. John of God, help is not on the way.

Saturday, June 18, 2011

Carlyle Group to Tuck Private Tail for IPO

Bloomberg reported The Carlyle Group's motivation for an independent public offering.   The private equity underwriter's (PEU's) aim is twofold.  Carlyle wants to raise money for diversification and monetize founders' investments in the firm, according to Colin Blayden, Director of the Center for Private Equity and Entrepreneurship at Dartmouth's Tuck School of Business.  Blayden remarks include:

1.  The challenge comes in predicting future cash flows of these companies.

2.  The private equity business has never had trouble raising capital.  Carlyle hadn't gone to the public markets to raise money to invest, until now. (The firm with over $106.9 billion under management may ask for $1 billion via the IPO, which is 0.9% of funds under management)

3.  Stock is a form of currency for diversification, future acquisitions.

4.  Looking for liquidity for founders and senior partners who want to monetize a portion of their holdings.  (Think Pete Peterson and Blackstone)

5.  What's being sold is a piece of the management company, the part that generates management fees, carried interest and other fees.  Carlyle is not selling their investments, which remain in limited partnership form.  Carlyle will continue to raise billion dollar investment funds under their usual limited partnership model

6.  Bain Capital and TPG plan to stick to the private PEU model. They may sell a part of their management company to a private investor group, but have sworn off an IPO. 

Carlyle is part owned by CalPERS, a pension fund, and Mubadala Development Corp, a United Arab Emirates sovereign wealth fund, which makes the IPO Carlyle's third monetization.

Flash back to 2003, when Tuck Forum stated:

The private equity industry has been a remarkable engine of growth in the United States. The industry's preference for privacy, however, has led to one of its primary challenges: the lack of consistent portfolio valuation and financial reporting. Accurate valuation is becoming more critical as public employee pension plans and other institutional investors increase their stakes in venture capital and buyout funds. 

Center head Colin Blayden added:

There are no standards dictating how a VC firm should account for its fund returns or for the rise or fall in value of its portfolio companies. It's all too common for limited partner investors (LPs) to rant about receiving three different valuations of the same portfolio company from three different venture funds.

Colin Blaydon, a professor at the Tuck School, argues that LPs are often unsure of which number to believe and may even suspect one of the firms is lying to them. This is a problem because LPs must report these numbers to their oversight boards, and, naturally, want them to be accurate.

PEU's addressed the issue in 2004:

"What they're trying to do is to make reporting reflect actual valuations and they've prescribed specific mechanisms in which to do that," said Colin Blaydon, a professor at Dartmouth College's Tuck School of Business, who has provided feedback. "But the proof is in the pudding." 

The now seven year old, moldy pudding says Carlyle is hard to value because of the difficulty in predicting future cash flows.  Scrape off the top and put the pudding on the table.

Carlyle isn't the only PEU hoping to pull a Pete Peterson.  OakTree Capital announced a $100 million IPO.  It went with Goldman Sachs and Morgan Stanley.  Carlyle chose JPMorgan, Citi, and Credit Suisse.  The competition to push PEU stakes is clearly delineated on Wall Street, where the landscape is filled with greed addicts.

Update 6-25-11:  Masters of the Universe are cashing out.  It's all about the carry, which we'll hopefully find in Carlyle's S-1.

Update 6-28-11:  Universe Master David Rubenstein did his usual puffery regarding how private equity beats public companies, except The Carlyle Group is going public, thus eating Rubenstein's proverbial Golden Goose.

Update 4-26-19:  Carlyle's David Marchick teaches a PEU course at Dartmouth's Tuck School of Business.  Marchick left Carlyle after twelve years to return to his former law firm Covington Burling.

Update 11-11-19:  Carlyle co-founder David Rubenstein spoke at Tuck   He said “Take advantage of the position you find yourself in.” Carlyle affiliate Sedgwick did just that on mass shootings.

Update 4-25-20:   PEU crisis management is the new course at Tuck, taught by former Carlyle exec David Marchick.  It focuses on how to profit during the coronavirus pandemic:  "helping the CEOs of portfolio companies on messaging about painful layoffs, advising portfolio companies on which government programs they might apply for to weather the downturn, advising the CEO of the private equity firm about her visibility and profile during the crisis, and advising about messaging on the crisis to limited partners."  Marchick is Director of the Center for Presidential Transition and his job is to ensure politicians Red and Blue continue to love PEU..

Friday, June 17, 2011

Carlyle Goes with JPMorgan, Citi & Credit Suisse

DealBook reported:

As it prepares to go public, the Carlyle Group has picked three banks — JPMorgan Chase, Citigroup and Credit Suisse — to lead its pending initial public offering

Did Goldman's Lloyd Blankfein cry over losing this chunk of God's work? I can't wait to read Carlyle's S-1, especially the lawsuits section.  It should be full of drama and intrigue.  I wonder if underwriters will offer a disclaimer on future management fees or length of time the DBD's, Carlyle founders, may hang around.  . 

Thursday, June 16, 2011

New America Infrastructure Bank

Hearst Newspapers reported:

There should be an infrastructure bank, a public-private partnership bank, devoted to long-term — up to 45 years — financing of infrastructure projects. The idea, as espoused by panelists at a meeting on Capitol Hill last week.

Former Bush Transportation staffer Tyler Duvall, now with McKinsey & Company, spoke on Capital Hill, as did The Carlyle Group's Robert Dove, head of Carlyle's $1.2 billion infrastructure fundHearst gave Robert special Love.

Robert Love of the Carlyle Group beamed when he described a model project of public-private cooperation along highways in Connecticut.

Tyler Duvall retains his profiteering stripes, honed under W.  Tyler defended financiers' cost of capital and the need to make a superior return.  Carlyle targets 20% annual returns for infrastructure, subsidized by cheap money and long term guarantees from government entities.  Dove loves public money, stating forty year capital at a low interest rate, makes an unfinancible project fly.  Public subsidy, a private equity writer's (PEU's) dream

Moderator Michael Hirsch raised the issue of leverage, saying $10 billion could be leveraged to better than $600 billion.  Tyler avoided the 60:1 leverage question, reiterating his concern of quickly approving PPP projects.  Carlyle lost a fund leveraged 39:1 in spring of 2008.  Carlyle Capital Corporation (CCC) was one canary in the risk coal mine.

Carlyle's Dove raised the topic of financially stressed government's selling infrastructure assets, likely at discount prices.  Dove didn't cite any concern over selling capital assets or their revenue streams to fund short term government programs.  Chicago did this with parking, going through 75 years of money in less than 5 years.

Dove closed by saying union pension funds are invested in his $1.2 billion infrastru-cture fund.  They are chasing return in partnership with Carlyle.  This -helps explain one hollow SEIU promise. 

New America Foundation's Board is Chaired by Eric Schmidt of Google.  Did Schmidt talk infrastructure financing in St. Moritz recently?  Did they talk about the oligarch infrastructure cat fight on a Detroit bridge?  Maybe so.

Update 6-18-11:  Reuters commented on municipal, state and federal government asset sales

Update  9-1-11:  Sphere Consulting pushed the Infrastructure Bank.  Are they hoping for PEU business?

Update 4-17-12:  Private Equity News reported that pensions are planning to put as much as $3.5 trillion into infrastructure projects over the next decade, with allocations to the asset class rising “as high as 10% to 15%.”

Update 4-19-14:  The PEU Infrastructure boys met with Obama's Treasury Chief on this subject.

Wednesday, June 15, 2011

Carlyle Group's IPO: Beauty Pageant

Dealbook reported Wall Street's courting of The Carlyle Group's IPO.  It called the process a "beauty pageant."  Pageant preparation started with Carlyle dressing up "cases" for web consumption.  They omitted hedge fund failures BlueWave Partners and Carlyle Capital Corporation.  Also hidden, Carlyle's dark weight loss secret, purging affiliates for ginormous pre-IPO profits.

Wall Street banks lining up for Carlyle's business?  Now that brings back memories.  Carlyle co-founder David Rubenstein compared the deals to sex, citing how private equity underwriters (PEU's) were "unable to resist the temptation."

Who will get the edge and lead role in taking Carlyle public.  My guess:  It'll be the one wearing Scalina lingerie.  Is that Lloyd Blankfein or Jamie Dimon?

America's greed addicts run a never ending pageant, winning the world's most wealthy title.  In that light Carlyle added two hedge funds, Claren Road and a 55 percent stake in Tiger Management LLC-backed Emerging Sovereign Group LLC.  Let's hope they fare better than Carlyle's unpublished stories.

Update 6-17-11:  Jamie Dimon looked the best in Scalinas.  JPMorgan is expected to get the lead role, according to DealBook.

Tuesday, June 14, 2011

A Decade of Feeding the PEU Wolf

Flash back to March 2004.  The Carlyle Group had $17.5 billion under management and private equity underwriters (PEU's) were coming off a difficult 2002-2003.  But things were starting to look up.

March 2004 found Google hosting a thread on the origin of the Native American tale of the two wolves (dogs).

The parable was about a young Cherokee who is brought before the tribal elders, who are concerned about his aggressive tendencies. One of the elders takes the young man aside and tells him that his anger is understandable, since all humans have within them two wolves. One wolf is good and peaceable, and the other is evil and angry. The two wolves are in constant battle with one another, since neither is powerful enough to destroy the other. The young man asks the elder "But if they are of equal power, which wolf will win?" And the elder replies, "The one you feed the most."
Other versions elaborate on evil, adding anger, envy, jealousy, sorrow, regret, greed, arrogance, self-pity, guilt, resentment, inferiority, lies, false pride, superiority, and ego.  For good they include joy, peace, love, hope, serenity, humility, kindness, benevolence, empathy, generosity, truth, compassion and faith.

The Carlyle Group now manages over $106.7 billion, fed by the policies of Presidents George W. Bush and Barack H. Obama.  Carlyle brags of 30% annual returns on equity.   Their co-founders are multi-billionaires, who will climax their greed-a-palooza with a looming IPO.  PEU's have insider access to America's hallowed halls of government, where political donations turn into government contracts and preferential treatment via laws, earmarks, taxes and regulations.  While happy to take Uncle Sam's money for products/services, PEU's hate paying taxes.  They load up affiliates with debt, while charging annual management fees.  They've sent jobs to China and low wage portions of the world, while off shoring funds and profits. 

For the last decade PEU's fed off Congress and the White House.  Private equity provides a "post public service" career for many politicians.  The PEU wolf is strong.  The pack is already in healthcare and spreading.  It has its eyes on infrastructure.  Greed addicts remake America in their image.  I fear for the good wolf's survival under the current plague..

That brings to mind another Native American story, the smallpox blanket.  Don't worry, a PEU has the antidote.  With whom will they share and at what price

Being good in a PEU world, that's the challenge.

Monday, June 13, 2011

Boston Private Director Charged with Offshore Tax Cheating

The Carlyle Group's Boston Private Financial Holdings has a number of subsidiaries.  Boston Private Bank & Trust (BPBT) is one. Their website states:

Boston Private Bank & Trust Company was rated as the top wealth management brand among wealthy investors in a recent Luxury Institute survey.

The survey, released on April 20, asked investors with at least $5 million in net worth to rate wealth management firms based on four indices, including quality of service. Boston Private Bank & Trust Company is the only brand among 34 evaluated to rate above average across all four component measures of the Luxury Brand Status Index TM.

Irony has Michael Schiavo, a BPBT board member, using a partner's UBS Swiss bank account to ship pretax money to a Bermuda bank.  Schiavo reached a plea agreement with the IRS for his crimes.

Adding to the irony, Carlyle owns a Bermuda bank, Butterfield Bank.  Schiavo did not use Butterfield for his tax evasion, instead going with HSBC Bank Bermuda.  Was Schiavo aware of Carlyle's offshore activities?

DBD Cayman Holdings Ltd
DBD Cayman Ltd
Carlyle AP-Q (Cayman) Co investment, L.P
Carlyle Asia Growth Partners, III, L.P. (Cayman)
Carlyle Com Hem Partners II L.P. (Cayman
Carlyle IMO Partners I LP (Cayman)
Carlyle IMO Partners II LP (Cayman)
Carlyle Japan International Partners II, L.P. (Cayman)
Carlyle Multi-Strategy Master Fund, Ltd (Cayman)
Carlyle Riverstone River Partners II, L.P. (Cayman)

Carlyle set up many offshore funds during the time of Schiavo's tax cheating.  Ironically, Boston Private survived the financial meltdown via $153 million in TARP funding.  Did Schiavo not make the connection between Uncle Sam's generosity and his board pay?

Greed addicts have an end in common.  There's no telling about the means.

Banks Shine at Bilderberg

In a setting worthy of The Shining, Switzerland's St. Moritz hosted foreign bank representatives at the Bilderberg Group meeting.  Attending this past weekend were.

Ackermann, Josef, Chair Management Board/Executive Committee, Deutsche Bank
Agius, Marcus, Chairman, Barclays PLC
Flint, Douglas J., Group Chairman, HSBC Holdings

Over Bilderberg weekend Zero Hedge posted how the U.S. Federal Reserve Bank enriches foreign banks. Wall Street representatives also attended Bilderberg.  Those in St. Mortiz benefiting from the Fed's largess include:

Orszag, Peter R., Vice Chairman, Citigroup Global Markets, Inc.
Rockefeller, David, Former Chairman, Chase Manhattan Bank (now JPMorgan-Chase)
Sutherland, Peter D., Chairman, Goldman Sachs International
A number of Fed primary dealers were involved in offshore tax cheating.  Primary dealers are primary stealers.

Greed addicts use every method possible to feed their twisted habit. The Bilderberg confab is but one means.  Keeping democracy in check is the other.  That's a 1958 Bilderberg stated aim.

Sunday, June 12, 2011

Bilderberg's Dynamic: PEU Attendees

Greed addicts turned out for the annual Bilderberg Conference, a global plotters convention.  As usual, a number of private equity underwriters (PEU's) made the public list:

Altman, Roger C., Chairman, Evercore Partners Inc.
Castries, Henri de, Chairman and CEO, AXA
Collins, Timothy C., CEO, Ripplewood Holdings, LLC
Jacobs, Kenneth M., Chairman & CEO, Lazard
Johnson, James A., Vice Chairman, Perseus, LLC
Jordan, Jr., Vernon E., Senior Managing Director, Lazard Frères & Co. LLC
Keane, John M., Senior Partner, SCP Partners; General, US Army, Retired
Kissinger, Henry A., Chairman, Kissinger Associates, Inc.
Koç, Mustafa V., Chairman, Koç Holding A.S
Kravis, Henry R., Co-Chairman and co-CEO, Kohlberg Kravis, Roberts & Co.
Orszag, Peter R., Vice Chairman, Citigroup Global Markets, Inc.
Rockefeller, David, Former Chairman, Chase Manhattan Bank
Rubin, Robert E., Co-Chairman, Council on Foreign Relations; Former Treasury Secretary
Sutherland, Peter D., Chairman, Goldman Sachs International
Thiel, Peter A., President, Clarium Capital Management, LLC

Did Carlyle's David Rubenstein or Blackstone's Stephen Schwarzmen drop in like Bill Gates?

Here's a hint as to how pervasive private equity underwriters became the last decade.  It's General Keane's bio from General Dynamic's SEC filings::

John M. Keane, 68, director since 2004.

Retired General, U.S. Army. Vice Chief of Staff of the Army from 1999 to 2003. Senior Partner of SCP Partners (private equity) since 2009. Managing Director of Keane Advisors, LLC, (private equity) from 2005 to 2009. Member of the Department of Defense Policy Board. Mr. Keane currently serves as a director of Cyalume Technologies Holdings, Inc., M&F Worldwide Corp. and MetLife, Inc. 
The M & F Worldwide is MacAndrews & Forbers Holdings, which smells like a PEU. Keane is also a member of the Council on Foreign Relations, the United States Department of Defense Policy Board, a trustee of the Rand Corporation and a contributor for Fox News.

Previously, Keane served as Senior Advisor for KKR, advised the Chairman & CEO of URS and was on the board of Allied Barton Security.

Greed addicts need the help of governments and international institutions to earn 30% annual returns.

Lamy, Pascal, Director General, World Trade Organization
Trichet, Jean-Claude, President, European Central Bank
Zoellick, Robert B., President, The World Bank Group

Keane serves on the Energy Security Leadership Council of Securing America's Energy Future.  Their recommendations shift the toll to drivers, while sticking to oil.

Did the ESLC play a role in President Obama's declaring war on Libya?   CNBC reported Libyan oil comes out of the ground for a buck a barrel.

Who's next on the attack list for Bilderbergers? Surely, our U.S. government attendees know:

Gates. Robert, Secretary of Defense
Steinberg, James B., Deputy Secretary of State
If Gates and Steinberg stays mum, maybe Christine A. Varney will speak up.  One might expect an Attorney General to be open about the proceedings, allaying fears of U.S. officials conspiring with foreign leaders like.

Mandelson, Peter, Member, House of Lords; Chairman, Global Counsel

The world saw how Mandelson helped free the Lockerbie bomber.   He defended Tony Blair's outreach to Libya's Gadhafi.  Did Bilderberg help rehab Gadhafi, before re-making him a pariah?  Bilderberger John McCain did his part with both scripts.

Bilderberg retains its PEU odor.  Note the crack reporting by the Associated Press. At least The Guardian sent a real reporter, who asked questions.  Did Charlie Skelton note the greed addicts Internet theme?  Democracies need to control the people's voice.

"Everyone recognised that the weakness of a democracy was that its government had to do broadly what the people wanted it to do …"  Lord John Hope - Bilderberg meeting 1958

It's a longtime Bilderberg theme, recently taken up by Sarkozy and company.  Meanwhile democratic money is free to move around the globe.

Update 6-13-11:  General Keane's MacAndrews & Forbes $2.8 billion contract with the feds for smallpox antiviral medicine is under scrutiny.  M & F has Frances Townsend (Red) and Andy Stern (Blue) serving on SIGA's board.  Both have personal poxes.  Fran's abysmal Hurricane Katrina Lessons Learned report benefited W.'s PEU friends.  Andy Stern played political theater challenging the same PEU's purchase of ManorCare.  The watchdog went to sleep after the buyout.  Andy did strike a labor agreement for Connecticut rest stops before investigators hauled boxes from his SEIU office.

Update 9-20-11:  Defense industry consolidation calls for mega-mergers.  A Carlyle Group defense expert weighed in.   Also, Carlyle owns Booz Allen Hamilton, which is in a unique position to steer combinations as a huge government consultant.