Carlyle to Swoosh into EMEA

The Carlyle Group hired Nike's Rory MacMillan as principal and director of external affairs for Europe, the Middle East and Africa.  MacMillan held a similar position for Nike.  Dow Jones Newswire reported:

"Rory's extensive public affairs and communications background will be a great asset to our investment teams and portfolio companies throughout Europe, the Middle East and Africa," said David Marchick, managing director and global head of external affairs.

Macmillan's role at Carlyle is a newly-created position and reflects the buyout industry's move to interact more closely with governments and regulators as the firm deepens it geographic and product reach throughout the region. 

Carlye hired MacMillan to influence peddle in a PEU world.  Private equity underwriters became ubiquitous in the new millennium, doing so by leveraging political influence.  Carlyle sells directly to Uncle Sam, sponsors legislators who give PEU's preferred taxation and regulatory breaks.   Carlyle benefits from insider access which helps co-founder David Rubenstein's government tea leaf reading.

While swooshing to Carlyle's rescue in Europe, Rory has an Edscha headache to clear.  The Middle East has mostly forgotten the implosion of Carlyle Capital Corporation, given Carlyle's "Great Cash In" and looming IPO.  Marchick already did the hard work, keeping Rubenstein out of the list of people needing to make amends for catering to Libya's Gadhafi.  Rory might influence where Gadhafi's $118 million invested with Carlyle may end up.

Everything's globally fast and like an old pair of sneakers, carries a PEU odor.

Carlyle's Edscha Implosion

The case is Edscha North America Inc., 09-39055, U.S. Bankruptcy Court, Northern District of Illinois (Chicago).   Bloomberg reported:

The Chapter 11 filing came more than eight months after the parent company, Edscha AG, began its own insolvency proceedings in Germany. The companies are ultimately owned by Carlyle Group. The U.S. company listed assets of $6.4 million against debt totaling $672 million, including $629 million in secured claims.  Secured creditors were already paid in part from sales of assets.

The U.S. division of Edscha will make good on less than 1% of Bloomberg's cited debt.

The Pension Benefit Guaranty Corp. will receive $694,000 cash on account of its $11.8 million claim.

The Carlyle affiliate paid 5.8% of the PBGC claim.  Note that Carlyle heavily promotes its investment offerings to pension funds.

Edscha won't make Carlyle's pre-IPO storytelling.  Neither will nine other stories.  It's all part of Carlyle's openness and demystification.

Update 7-31-11:  Capital Buzz reported "it’s shaping up to be the most lucrative in Carlyle’s 24-year history." The "Great Cash In" will climax with Carlyle's IPO.

CDS for U.S. Treasuries

A lawyer for the International Swaps & Derivatives Association said the trigger for a U.S. debt default is unclear.  Organizations selling credit coverage via credit default swaps (CDS) do not have an operational definition of default. IFR reported:

"It’s not necessarily clear whether US CDS would trigger if they did not manage to resolve the debt ceiling negotiations successfully and then subsequently failed to make coupon payments on Treasuries,” said David Geen, general counsel at ISDA. “Usually it would be a clear failure-to-pay credit event if payments were not made by the end of the grace period. The problem is that there does not appear to be clarity about grace periods on Treasuries and we are currently researching this issue.”

“In order for there to be a credit event there has to be publicly available information that says this payment was due on this day and it wasn’t made, and that may not be that easy to demonstrate,” he added.

 CDS prices on U.S. Treasuries have an interesting history:  Summer 2008 showed:

The cost to insure Treasury debt with credit default swaps jumped to 16.5 basis points, or $16,500 per year for five years to insure $10 million in debt, from 8 basis points on Thursday, an analyst said.

Credit default swaps are used to buy protection against the likelihood of a borrower defaulting on its debt and to speculate on an issuer's credit quality. Protection costs rise when people become more concerned about an issuer's credit quality.

February 2010 found:

In the credit default swap market, the five-year price to insure against a U.S. Treasury default was last about 57 basis points late Friday after rising to 59.3 basis points earlier, a level not seen since April 2009.

This meant traders would pay roughly $57,000 per $10 million in Treasury exposure late Friday. It was also six times less than what it would cost to insure against Greek, Portguese and Spainish government debt

This week's rise in Treasury CDS prices implied traders have priced in about a 5 percent chance of a U.S. government default in the next five years, according to the credit data firm.

With a potential default less than two weeks away, CDS odds didn't increase.  A July 19 Reuters report stated:

Five-year protection costs, the most liquid contract, fell by 2 basis points to 54 basis points, or $54,000 per year for $10 million in debt, according to Markit.

Oddly, in a story comparing corporate debt to Treasuries WSJ pegged the odds of default much lower:

Credit-default swaps on the U.S. now imply a 0.75% cumulative chance of default over five years, according to Moody's Analytics. By comparison, such swaps imply a 0.7% cumulative chance of default for Microsoft over five years, 0.5% for Exxon and just 0.35% for Johnson & Johnson.

Wall Street must see little risk of default, otherwise CDS prices would be rising like 2008.  Also, investors would want coverage on a greater portion of Treasury debt. With $9.7 trillion in Treasuries outstanding, credit default swaps cover a mere $26.1 billion in gross notationals.  That's 0.27%.

Update 7-27-11: Reuters reported one-year U.S. CDS price rose to a record high 85 basis points, up 8 basis points on the day, while 5-year U.S. CDS increased 3 basis points at 62 basis points, a level not seen since February 2010, according to data firm Markit.  NPR put together a graph.  Note CDS prices are a fraction of levels seen after Lehman's implosion

Robber Baron Preserves Magna Carta: Document of Barons

Carlyle Group co-founder David Rubenstein showed his philanthropic side by donating funds to restore his copy of the Magna Carta.  Isn't he improving the value of an asset he purchased at auction for $21.3 million?  The document is at the National Archives under a long term loan.  

It's symbolic for a modern day robber baron to own the Magna Carta, which entrusted 25 barons to enforce its provisions:

Earls and barons shall be fined only by their equals, and in proportion to the gravity of their offence.

The document addresses men who destroy people or property:

The guardian of the land of an heir who is under age shall take from it only reasonable revenues, customary dues, and feudal services. He shall do this without destruction or damage to men or property. If we have given the guardianship of the land to a sheriff, or to any person answerable to us for the revenues, and he commits destruction or damage, we will exact compensation from him, and the land shall be entrusted to two worthy and prudent men of the same `fee', who shall be answerable to us for the revenues, or to the person to whom we have assigned them. If we have given or sold to anyone the guardianship of such land, and he causes destruction or damage, he shall lose the guardianship of it, and it shall be handed over to two worthy and prudent men of the same `fee', who shall be similarly answerable to us. 

Robber baron equivalents are management fees and carried interest.   They count on high interest expenses cutting into monies owed the Crown (Uncle Sam).  A number of Carlyle affiliates harmed people or property.

1.  LifeCare lost 25 patients after Hurricane Katrina.  Carlyle is vigorously fighting wrongful death lawsutis.

2.  Vought Aircraft promised Texans 3,000 new jobs for $35 million.  It cut 35.  Carlyle's founders could easily repay the debt.

3.  Yashili's melamine tainted milk sickened Chines babies and toddlers.

4.  Claris LifeSciences sold sterile injectables with foreign matter

There are many more sad stories of property destruction and people harmed, including Carlyle Capital Corporation, Blue Wave Partners, SemGroup, and the great employee shedding at UCI.  Where are the two worthy and prudent men who are supposed to come to the rescue?

Update 7-31-11:  Rubenstein will receive the Records of Achievement Award from the National Archives for his philanthropy.

Update 8-17-11:  Duke University will rename its Rare Book, Manuscript and Special Collections Library in honor of Rubenstein for his $13.6 million gift.

Update 2-18-12:  The Rehab PEU Rubenstein tour continued with a piece by McClatchy

Carlyle's Marchick Tells Kuhlman Story

Ex-Clinton White House staffer and Carlyle Group Managing Director David Marchick testified before Congress on The Power of Pensions: Building a Strong Middle Class and Strong Economy.

One of Carlyle’s earliest buyout funds, Carlyle Partners II, L.P., acquired Kuhlman Electric Corporation in October 1999.  Public and private pension funds accounted for 45 percent of the capital committed to that fund.  Kuhlman, which is based in Kentucky, was founded in 1894 and provides power transformers and related products to utility companies.

Carlyle managed our investment in Kuhlman through tough economic conditions resulting from California’s energy deregulation initiative, the collapse of Enron, major reductions in customer capital spending, falling wholesale prices, and the sector’s challenging credit crisis. As a result of these conditions, Carlyle valued the investment at zero.

However, Carlyle remained committed to Kuhlman. In fact, several investors and Carlyle employees personally invested additional capital to strengthen the company. Carlyle, together with management, helped turn the company around.  Nearly 10 years later, in August 2008, Kuhlman was sold by Carlyle to ABB, the global power and automation technology group, earning our investors an attractive return.For the fiscal years 2005, 2006 and 2007, Kuhlman’s revenue increased by approximately 26%, 26% and 45%, respectively. In 2007, Kuhlman experienced record results in all three of its operating divisions. In addition, Kuhlman’s overall employment levels increased approximately 25% during Carlyle’s ownership. At the time of the sale to ABB, the company had approximately 800 employees.  During the downturn, Kuhlman maintained a positive relationship with its unionized workforce, and organized labor was an important part of the turnaround.

Borg-Warner sold Kuhlman Electric to the Carlyle Group.  General H. Norman Schwarzkopf was on the board of Kuhlman Corporation before the deal frenzy began.  This is from Kuhlman's definitive proxy statement:

General Schwarzkopf is currently active as an author, lecturer and TV
consultant. He retired in August 1991 as a Four-Star General in the U.S. Army after having served as Commander in Chief, United States Central Command, Department of Defense, and Commander of Operations Desert Shield and Desert Storm. He currently serves as a director of Borg-Warner Security Corporation, The Washington Water Power Company, Remington Arms Company, Inc., and Home Shopping Network, Inc.

Did Stormin' Norman market Kuhlman to David Rubenstein in an early D.C. insider deal?  Borg-Warner's 1999 10-k stated:

The electrical products businesses acquired from Kuhlman consisted of Kuhlman Electric Corporation (“Kuhlman Electric”) and Coleman Cable Systems, Inc. (“Coleman Cable”). These businesses manufactured transformers for the utility industry and wire and cable for utilities and other industries. At the time of the Kuhlman acquisition, the Company announced that it intended to sell the businesses by the end of the year. As of December 31, 1999, the Company had completed the sales of both Kuhlman Electric and Coleman Cable. The Company received cash proceeds of approximately $227.1 million and $30.3 million face value debt instruments from the buyers of the businesses. The debt instruments were adjusted to a carrying value of $12.9 million because of their terms and credit-worthiness.

Carlyle gave face value debt of $30.3 million, revalued to $12.9 million?  That's junk debt, going for 42.5 cents on the dollar.  The 10-k had more to say about the sale.

Cash proceeds from the sales of Kuhlman Electric amounted to $105.1 million. 

Kuhlman Electric was sold to Carlyle Group, L.L.C. for a net sale price of $120.1 million, including debt securities with a face value of $15.0 million.

What about the compelling employee job numbers cited by Marchick? Kuhlman's pre-sellout to Borg-Warner showed:

Number of employees
1997 4,194
1996 2,782
1995 2,284
1994 2,375
1993 2,364

These numbers include additional divisions.  Kuhlman provided no figures specific to their electrical transformer division.  They can be deduced from Borg-Warner's employment information:

As of December 31, 1999, the Company and its consolidated subsidiaries had approximately 14,400 salaried and hourly employees (as compared with approximately 10,100 employees at December 31, 1998), of which approximately 9,900 were U.S. employees.

These numbers point to roughly 700 employees in Kuhlman's Electrical Division.  Carlyle claims it grew Kuhlman to 800 employees, a 14% increase.  A 100 person addition over 9 years equates to an annual increase of 1.5%.  Giving Carlyle their 25% claim, that's an annual employment increase of 2.8%.  How does that compare to Carlyle's investment returns, which Marchick referred to as "an attractive return."

Old stories can teach.  The question is what?  Carlyle's using Kuhlman to sell their upcoming IPO.  Carlyle's PEU ilk decimated the middle class during their decade of ascension.  Carlyle affiliate UCI's SEC filings show employment fell under PEU ownership from 6,900 in 2004 to 4,350 in 2009.

Carlyle just signed a deal for RAC, sans pension plan.   There are other stories that could be told before Congress. One is the story of Carlyle's sale of Standard Aero and Landmark Aviation to Dubai Aerospace.  Did David Marchick help that deal go through without Dubai Ports World (DPW) levels of public outrage?

Marchick can be thanked if it turns out Lenovo computers played a key role in Chinese cyber espionage.  Surely, a Congressional committee has information on Pentagon attacks by a nation state and how it was perpetuated.  It wasn't the committee providing Marchick a stand to conduct puffery.  So much remains undisclosed.

Update 7-16-22:  American University and just hired former Carlyle Group Managing Director David Marchick as Dean of AU's business school. 

Crestview: Crest Fallen USA

Mike Farrell reported Crestview Partners and MidOcean Partners, which own 42% of Insight Communications, could buy The Carlyle Group's 42% stake, given their right of first refusal.  MidOcean sports George Pataki. Which private equity underwriter (PEU) with a heavy hitter ex-politician will buy out Carlyle's stake?  Carlyle is renowned for its political connections.

White researching Crestview Partners, they recently added Western Company of Texas, a shale water play, to Select Energy Services.  Crestview's initial investment in SES came in May 2010.

The Standard Times ran a series on massive amounts of water and toxic chemicals used in shale drilling, via a technique known as fracking.  SweetH2O means sweet PEU profits.

Crestview's stake in the Barnett Shale overlaps Carlyle's.  How long before Crestview is sued for water that burns?

PEU's poision America's economic environment.  It's no surprise they foul life giving water.  Surely, the air is next.

CORRECTION 8-15-11:  The original version of this piece had Bob Rubin as a Senior Advisor for Crestview Patners.  That is incorrect.  Rubin is with Centerview Partners, not Crestview.  I apologize for this error.

Update 8-15-11:  Carlyle, MidOcean and Crestview sold Insight to Time Warner for $3 billion.

One PEU Meets One PR

The European Private Equity Underwriters Roundtable (EPEUR) will hire a public relations firm to improve the industry's reputation.  The Carlyle Group and CVC Capital are members of the PEU association.  PRWeek reported:

Final pitches were due to take place this week, with just four agencies still in the frame. Blue Rubicon and Brunswick were said to be front-runners to pick up the six-figure account.

Brunswick Group is as global and politically connected as Carlyle.  One PEU meet One PR.