PEU Default Risk More than Twice Public Firms

WSJ reported:

The default risk of companies owned by private-equity firms is 2.5 times that of their public counterparts, according to data collected from banks, insurers and asset managers by analytics firm Credit Benchmark.

Private-equity firms use leveraged loans, rated below investment grade, for the financing of buyouts of target companies. Financial institutions raised their estimates of the average probability of default—or nonpayment—for such loans to about 6% in September from 5.44% a year earlier, according to the data.

A jump in leveraged-loan defaults could have more impact on global finance than in years past because there are far more of the loans in existence and they are broadly held by mutual funds, institutional investors and collateralized loan obligations, or CLOs.

Carlyle Group co-founder David Rubenstein said the following on CNBC earlier this year:

Let me just say that private equity has done a pretty good job of improving the efficiency of the companies in the United States for 30 or 40 years. And around the world, people like private equity, that come into their country to show them how to improve and modernize companies. And I think it has created value for the economies in which it operated. There’s no doubt there’s a fair amount of money in private equity now. That’s because the returns have been very good. The people aren’t putting money in private equity because the returns are bad. The returns are good.

How does efficiency result in a much higher debt default risk, which can turn into systemic risk in a major downturn?  That's outside Mr. Rubenstein's approved question list for the business media.

Forbes also wrote about private equity's rising default rate:

a significant amount of high yield debt and leveraged loans are not necessarily being used for sustainable growth strategies for the firms and no evidence points to those funds being used to increase workers’ wages or to hire more. Recently, I wrote about how private equity has been causing unemployment in thousands of the firms that they buy out.

 The greed and leverage boys have one interest in mind and it's not the common citizen's.

Update 11-25-19:  PEU's latest debt shtick, the unitranche which combines "senior and junior debt into a single tier and eliminates the syndication process, unitranches can be arranged in a fraction of the time it takes to complete a traditional leveraged loan."  The articles states they remain untested in distressed scenarios.

Taylor Swift's Plea for Help Tests Carlyle Cool

Music superstar Taylor Swift has been blocked from using older songs and video in her upcoming American Music Awards appearance.  The Independent wrote:

“I’ve been planning to perform a medley of my hits throughout the American Music Awards,” she wrote, adding that Braun and Borchetta “said that I’m not allowed to perform my old songs on television because they claim that would be re-recording my music before I’m allowed to next year.”

This continues the ongoing bullying of Swift by Big Machine, which purchased Swift's music with funds from The Carlyle Group. 

Swift is being honoured with the Artist of the Decade trophy at the AMAs, which take place on 24 November.

An investor might view this award as adding to the value of their music holdings in Taylor Swift.

The artist is explicitly seeking help from Carlyle.  CNBC reported.

“I’m especially asking for help from The Carlyle Group, who put up money for the sale of my music to these two men.”

The Carlyle Group declined comment on the CNBC story.  Bloomberg reported:

"Taylor Swift’s feud with her record label reveals a little-known fact about the entertainment business: the outsized role private equity plays in funding its biggest stars.Swift asked Carlyle Group in a tweet on Thursday to help her as she battles to secure ownership of albums she recorded with her previous label.  The pop star didn’t criticize Carlyle, only appealing for its help. But her conspicuous mention of the company put a spotlight on an industry her legions of young fans normally wouldn’t have reason to pay attention to. Google searches for Carlyle Group surged after her tweet."

Which cool Carlyle side will they show?  So far it's been the cool, arrogant, disconnected, aloof, greedy side.  That could change.

The public face of Carlyle is co-founder David Rubenstein.  Swift could appeal directly to her fellow rap star.

Rubenstein met with other music legends in the past.  Take Dr. Dre. 

Carlyle Cool could be at risk.  Think Beats, Golden Goose and Supreme.  Carlyle owned Beats for less than a year, making huge money flipping the company to Apple.

Carlyle wants to flip Golden Goose Deluxe Brands, maker of luxury sneakers.

I'd venture these sneakers are popular in entertainment circles.  Does Taylor have a pair of Golden Goose Superstars (retail price $1,770)?  If so, she has options.

Carlyle invested in Supreme, the epitome of urban skater cool.  Esquire is concerned that Carlyle's past profits from death could rub off on Supreme.

Styles can change in a heartbeat, especially under the direction of a pop-star with millions of fans.  How many appearances does David Rubenstein have in the next week?  Will any enterprising reporters ask for Carlyle to respond to Taylor Swift's request?  Carlyle cool is at risk in a way they've never experienced.

Millions of teens could hate The Carlyle Group overnight.  Their parents will surely hear of Carlyle's cruelty to their favorite musician.  These are the very people Carlyle wants to sell retirement investment products in the coming years.   Carlyle spent decades building its good name.  It might swiftly evaporate.

Update 11-28-19:  NYT reported Carlyle intervened to get the parties to a longer term agreement, one that jumps Carlyle's ROE hurdle.

Update 12-9-19:  Rubenstein told Fox News Maria Bartiromo "In that particular case, I do think there'll be a resolution of that in the near future.  Hopefully, [Swift] can continue to do very good music, but it's something that is more complicated than my being able to resolve it right here."  Rubenstein wants to make Beats like money off of Taylor Swift.

Update 12-15-19:  Swift called out Carlyle in her Billboard Women in Music acceptance speech for Woman of the Decade Award. Swift said that “private equity is what enabled this man, according to his own social media post, that he could ‘buy me,’” before adding, “[I’m] obviously not going willingly.”

Update 6-6-20:  Streetwear retailer Supreme is under fire for its connections to The Carlyle Group, given Carlyle's history in war making and oppressing peaceful protesters.  The article stated "including ownership of Combined Tactical Systems, a company that (as MC suggests) “specializes in the manufacture of military and police equipment such as tear gas canisters, flash grenades, breaching munitions (rubber bullets), and handcuffs.” 

Update 4-12-21:  Swift re-released her Fearless album.  Loyal fans are burying the old versions on Spotify.

Following Friday's midnight release of Fearless (Taylor's Version) — for which Swift re-recorded her music after failing to acquire the rights to her early albums two years ago — Swifties launched a campaign to bury the Big Machine version on Spotify.

Hopefully the unnamed investment firm can claw-back money from Ithaca and The Carlyle Group.  Taylor Swift, like the City of Missoula with Mountain Water, tried many times to buy back the rights to her music.

Carlyle Group's New Healthcare JV Raised ER Bills $25 Million

BusinessWire ran the following press release on The Carlyle Group's latest healthcare venture:

Cannae Holdings, Inc. (NYSE:CNNE) (“Cannae” or the “Company”) today announced that it has entered into an agreement to participate in a health care joint venture with an investment vehicle advised by an affiliate of The Carlyle Group and another investor with deep health care services experience. The joint venture will focus on acquiring, integrating and operating synergistic health care services companies in the provider and payer space.

Cannae will contribute its T-System business to the joint venture and Cannae’s joint venture partners will contribute equity capital to enable it to acquire other complementary health care services companies. As part of this effort, T-System has also entered into a definitive agreement to acquire a leading provider of coding and clinical documentation services to domestic health care providers which will be funded by the joint venture. 

At closing, it is anticipated that Cannae will be a minority shareholder of the joint venture and have all of its T-System intercompany debt repaid, which totaled approximately $60 million as of September 30, 2019. The investment vehicle affiliated with The Carlyle Group will be the majority controlling shareholder of the joint venture. 

T-Systems helped increase ER bills by $24.8 million for residents of Savannah, Georgia.  The case study showed how Carlyle's new JV will not bring healthcare costs down:

A few months after transitioning to T-System’s RevCycle+® service, Memorial University Medical Center’s revenue quickly increased to the numbers T-System had estimated. And, just a few months later, revenue continued to improve even further to $1,269 per patient visit, from the original baseline of $1,040 per patient visit.

Results

• $24.8 million gross annual revenue increase:

• $259 increase per patient for facility E/M charges\

• $31 increase per patient for facility procedure charges

• $502 increase per patient for observation services charges

A higher level of service was assigned for about 65 percent of the ED patients, and a lower level of service was assigned to three percent. Also, a higher level of service was assigned for about 70 percent of observation cases.

Healthcare is no longer about serving people.  At a recent reunion I asked healthcare professionals: "How has healthcare changed over the last few decades?"  Nurses, physicians and nurse practitioners said universally.  "It's all about money and numbers."

That's because the greed and leverage boys have infected healthcare.  The system may be septic.

Update 6-22-20:   The PEU JV added Trust HCS in January.  TrustHCS, based in Springfield, Mo., is a provider of staffing and advisory services for coding, clinical documentation improvement, denial management and coding education solutions.

Carlyle's Acosta to Enter Bankruptcy

The Carlyle Group will hand another affiliate back to creditors/bondholders.  PR Newswire reported:

Acosta's "pre-packaged" Chapter 11 Plan of Reorganization (the "Plan")

Acosta, Inc. ("Acosta" or the "Company"), a full-service sales and marketing agency, today announced that it has reached an agreement with more than 70% of its lenders and more than 80% of its noteholders, each by principal amount, on the terms of a comprehensive reorganization and recapitalization.  The deal will eliminate all of the Company's approximately $3 billion of long-term debt.  Further, investors have committed $250 million in new equity capital backstopped by institutions committed to the long-term success of Acosta.

The piece offered no word on how many billions Carlyle pulled from Acosta prior to bankruptcy (September 2014 to present).  Also, the release made no mention of The Carlyle Group.

New York City Retirement Systems invested $330 million in Carlyle's fund that owned Acosta.  A 2017 Q3 report showed the negative impact of Carlyle's ownership of Acosta:

Carlyle Partners VI, L.P. - Side Car, a 2014 Co-Investment partnership, generated a net value loss of $0.03 million during the third quarter of 2017. Acosta, Inc. drove performance as the holding was written down 11% to $226.4 million as of September 30, 2017.

Another PEU Sponsor fail for Carlyle.  How many people got hurt?  Recall LifeCare Hospitals, Carlyle Capital Corporation, ManorCare, Philadelphia Energy Solutions and now Acosta.

Update 12-1-19:  Bloomberg reported Acosta filed for bankruptcy in the Delaware U.S. District Court.

Update 3-3-20:  Forbes ran a story on Carlyle's failure with Acosta. While the piece did not highlight how much cash Carlyle pulled from the company it said, "Acosta is still running a respectable 10% net internal rate of return."

Ex-Medicare Chiefs Love PEU

Presidents George W. Bush and Barack H. Obama enacted significant healthcare reform in their terms in office.  Bush added the Medicare Prescription Drug benefit known as Medicare Part D.  Bush's Medicare Chief Tom Scully stepped down after Congress passed Part D.

Obama enacted the Patient Protection and Affordable Care Act (PPACA).  His White House Health Reformer Nancy-Ann Deparle was a former Medicare Chief under President Bill Clinton.  For a time Marilyn Tavenner and Andy Slavitt served as Obama's Medicare head.

What do these four individuals have in common?  Private equity underwriters (PEU).

Tom Scully - General Partner Welsh, Carson, Anderson and Stowe (WCAS)
Nancy-Ann Deparle - Partner and co-founder Consonance Capital
Andy Slavitt - Founding Partner Town Hall Ventures
Marilyn Tavenner - Board of LifePoint Hospitals, an Apollo Global affiliate, and Board of  Select Medical, a WCAS affiliate

The Atlantic reported PPACA passed due to:

"compromises that led to the ACA, executed by Obama and his then–chief of staff, Rahm Emanuel, are what staved off a full-scale medical-industry uprising against the bill."

PPACA was designed by for-profiteers for PEUs.  The greed and leverage boys have had a field day on citizen's wallets.  Surprise medical billing, thank Blackstone and KKR.

President Donald J. Trump's Medicare Chief Seema Verma:

"blasted "Medicare for All" even as some Democratic presidential candidates continue to propose the idea for healthcare reform. 

"I’m always very concerned that we’re hearing conversations about more government, more Medicare for All. I think those kinds of things are very scary to me,” she said. "We need to put patients in control of care, not the government."

Patients in control?  The only control I have is paying more and more out of pocket for the same limited care I access every year.

For that right I become an instrument in an algorithm.  Humana's Chief Strategy Officer said the company wants to be a healthcare company with elements of insurance:

"Part of predictive analytics is getting close to the member. We're partnering with organizations outside of healthcare where, with the member's consent, we can identify information they are sharing with us. Proximity is the key to predictive ability," 

Having my health insurer emulate the NSA?  That is very scary to me, as is the parade of PEU paid former Medicare Chiefs.

Healthcare is an absolute Gordian knot and it grows larger every year due to greed.

Around 45% of Americans said a major health-related expense could potentially lead to bankruptcy, according to a Gallup poll. Health care expenses can break the bank at any age, but they're especially detrimental to older Americans –- retirees in particular.

America's for-profit healthcare landscape is a trail of tears for many seniors who go bankrupt, even with health insurance coverage.

Two-thirds of people who file for bankruptcy cite medical issues as a key contributor to their financial downfall.

A new study from academic researchers found that 66.5 percent of all bankruptcies were tied to medical issues —either because of high costs for care or time out of work. An estimated 530,000 families turn to bankruptcy each year because of medical issues and bills, the research found.

Scully, Deparle, Slavitt and Tavenner don't have bankruptcy worries.  They count piles of cash from the very PEU healthcare profits breaking seniors bank accounts.

Former Medicare Chief Gail Wilensky sold ManorCare to The Carlyle Group as a board member.  Eleven years later Carlyle bankrupted the nursing home giant and Mrs. Wilensky had over a decade to grow her nearly $3.4 million in proceeds from ManorCare's PEU buyout.

Carlyle just added a huge insurance broker to its PEU family.  The Hilb Group offers health insurance.  Hilb's website states:

Like magic, you can increase benefits while reducing total costs. 

I work for a PEU affiliate and it has only reduced benefits, healthcare and otherwise.  Like evil magic I've seen coworkers disappear and service quality harmed.  This year I've had the highest out of pocket expenses in my lifetime for healthcare.  My employer states it emphasizes preventive care but I am unable to get a basic vaccination without having to drive several hours.

PEU greed and the for-profiteers who've commandeered the healthcare system are not looking out for my best interest.  They are looking out for theirs.

Update 12-12-19:  Andy Slavitt landed a board slot at Exact Sciences alongside Kathleen Sebelius, Obama's HHS Chief.  His background prior to serving as Acting Chief of Medicare/Medicaid included stints at McKinsey and Goldman Sachs. Currently Slavitt serves on the Board of Directors of United States of Care, a national non-profit health think-tank and advocacy organization, is co-chair of the Future of Healthcare Initiative at the Bipartisan Policy Center.

Update 8-2-21:  One division of PEU Apollo will sell LifePoint to another.  The "arm's length" transaction provided a $1.6 billion gain. Now the credit division can look forward to buying back LifePoint debt for pennies on the dollar.  

Update 2-19-21:  Nancy Ann Deparle had a banner payday after Consonance Capital sold Enclara Healthcare to Humana in 2020.  Enclara is "one of the nation's largest hospice and benefit management providers."  Yet, Humana intends to spin off Kindred Hospice as it prefers a partnership model for end of life care.

Update 4-3-22:   The average health insurance premium more than tripled for a family plan since PPACA passed in 2010.  Cost curve bent but in the wrong direction.  Concave went convex.  

Carlyle Co-Founder Rubenstein History Maker

The Guardian ran a piece on Carlyle Group co-founder David Rubenstein and his historic life as a modern day robber baron.  The story began with Rubenstein's revealing interview at The Economic Club of Washington, D.C. 

Rubenstein interviewed Secretary of State Mike Pompeo in late July.  Pompeo noted President Donald Trump's use of financial leverage to achieve diplomatic goals.  Somehow burnishing Trump's image and re-election chances became a U.S. diplomatic goal.

MR. RUBENSTEIN: OK. So, when you have decisions with the president, meetings with him, is he best with oral communications, written communications? What’s the process by which decisions are made? Is it through the NSC10 or informal?

SEC. POMPEO: Yeah. So, there’s a very robust NSC process. When I brief him myself, I always prefer to have a document. It’s the way I prefer to receive information. So, I almost always bring something – a one-page summary at the very least, that says here’s the outline of what it is that I think are the priorities now. We should think about how we should frame this particular problem. And then the president does like to engage in oral exchanges. And I’ve found them to be elucidating for myself. I often learn things as well. He’s very focused on where the money is, and how we use economic leverage to achieve our diplomatic ends.

The piece ignored Rubenstein's profiting from the American military-corporate-economic juggernaut.  That is part of The Carlyle Group's history.

David Rubenstein has a book to sell, in addition to his ever present cheer leading for private equity underwriters (PEU), also known as the greed and leverage boys.  His book highlights great men among our Founding Fathers.

Thomas Jefferson was the first businessman to use his slaves a collateral for debt.  The Smithsonian wrote:

It had long been accepted that slaves could be seized for debt, but Jefferson turned this around when he used slaves as collateral for a very large loan taken out in 1796 from a Dutch banking house in order to rebuild Monticello.  He pioneered the monetizing of slaves, just as he pioneered the industrialization and diversification of slavery.

The Carlyle Group used very large loans for Carlyle Capital Corporation.  CCC's 2007 year end results stated:

As of February 27, 2008, the Company’s $21.7 billion investment portfolio is comprised exclusively of AAA-rated floating rate capped residential mortgage backed securities issued by Fannie Mae and Freddie Mac, which are considered to have the implied guarantee of the U.S. government and are expected to pay at par at maturity. 

One week later Carlyle Capital Corporation was in deep trouble:

Carlyle Capital Corporation touched off a wave of selling on Thursday, especially in mortgage real estate investment trusts, after the company failed to meet some of its margin calls and received a default notice.

Carlyle Capital is a European listed, publicly traded company that is an affiliate of the much larger Carlyle Group, a private equity firm.

Carlyle Capital apparently received margin calls from seven different parties on Wednesday, totaling $37 million dollars. The company said that these parties demanded additional collateral and that Carlyle Capital was unable to satisfy four of their demands.

Carlyle Capital fell 58% on Thursday, touching off a wave of selling across the world that saw some REITS fall as much of 20%. The company is listed in Amsterdam.

According to a report in Bloomberg, most of Carlyle's counterparties are Wall Street firms. 

Two weeks later Carlyle revealed CCC would declare bankruptcy.  BBC reported:

On Wednesday, CCC said that it had not been able to refinance its business. It said it had so far defaulted on about $16.6bn (£8.1bn) of its debt and the only assets it had left were US government AAA-rated residential mortgage-backed securities. 

CCC said it also expected to default on this after the portfolio's value was marked down again on Wednesday.

On March 16, 2008 Reuter's reported:

Carlyle Capital, an affiliate of U.S.-based buyout firm Carlyle Group CYL.UL, said it has received default notices from its last two remaining lenders and believes that its lenders have now taken possession of substantially all of its U.S. government agency AAA-rated residential mortgage-backed securities (RMBS).

Carlyle Capital had $600 million in equity and $21 billion in debt.  A lawsuit revealed how Carlyle set up CCC's financing:

The RMBS assets were purchased using one-month repurchase (repo) borrowing. The assets were subject to daily margin calls if prices changed.

Financing long term assets with short term money, what could go wrong?  That question was not asked of Mr. Rubenstein.  It has bearing today as the Federal Reserve Bank entered the repo lending market in a big way. 

Carlyle danced away from CCC's carcass as it neared an IPO for China Pacific Insurance.

Previously, Carlyle Group announced that it was just an investment consultant for Carlyle Capital, under the agreement between them, and it did not buy any securities of Carlyle Capital, although some persons in Carlyle Group totally hold an about 15% stake in Carlyle Capital.

One might expect better from a storied private equity firm.  BBC noted at the time:

"Almost within the blink of an eye, a business that had borrowed $21bn from the world's biggest banks to invest in high-quality mortgage-backed securities will be gone, liquidated, kaput," said BBC business editor Robert Peston. 

"Such is the whirlwind blowing through global financial markets."

Six months after CCC's implosion the Financial Crisis hit.  Did that whirlwind grow into a Category 5 hurricane in part due to The Carlyle Group's actions?  Not asked, thus not answered.

Another item not recorded for history is why the Carlyle Group withdrew completely from the Corpus Christi oil shipping terminal at Harbor Island.  Carlyle lauded their role as "exclusive developer" one short year ago.

Trump's ongoing greatness and Rubenstein's ever present greed are unique in history. Neither make for an honest exploration of events.

Update 11-4-19:  PEU Blackstone's chief strategist warned the "mother of all bubbles" could blow up.  One sign of instability cited is the failure of the repo market.  JessesCafeAmericain shared a quote worthy of PEU founders and their exalted status:

"His money came from human misery and death and despair, as always it does.  Yet, there is none to reproach him, neither God nor man, and all fawn upon him and he will be a senator and crowds will laud him and he will have the ear of the President and all will honor his riches and consider him worthier than other men because of it.
Mankind adores its betrayers, and murders its saviors."
Taylor Caldwell, Captains and Kings

Update 11-5-19:  CNBC interviewed Carlyle co-founder David Rubenstein.  The PEU greed and leverage boys hate paying taxes.