Carlyle Group's Virginia Incursion to Extend to Beach?

The Carlyle Group's PEU brigade overran coal-fired power plants in Portsmouth and Hopewell.  They have their beady eyes on Virginia's port operations.  Will they continue their march to the coast? 

The Cavalier Hotel, a prime Virginia Beach property, is up for grabs.  Gene Dixon, Jr. lost a family lawsuit and his business empire will be dismantled.  The story of Gene Dixon, Sr.'s purchase of the Cavalier Hotel is Farmville legend.  After being refused a stay for his plain dress, Gene Sr. bought the Cavalier Hotel.

Gene Jr. plans to appeal the court decision so Carlyle might have time to consider a bid for the Cavalier.  However, Carlyle's going full press for Virginia's ports.

By Oct. 15, the state intends to announce which proposal is preferred or whether VIT should remain in control. They expect to sign a deal by the end of the year, essentially rushing to finalize an agreement before legislators return to Richmond and intervene.

Virginia's privatization scheme ensures difficulty in making apples to apples comparisons.  There is no RFP for interested firms to respond to in making their offers.  This opens the door for political influence in selecting a private partner for the state's public assets. 

Virginia inked a deal with GEICO to sponsor its rest areas for "safe cell phone use."  Never mind that most people stop in rest areas to relieve themselves.  Will people see or hear GEICO adds while going to the bathroom?

Virginia's other public-private partnership will build HOV lanes on I-95 in Northern Virginia.  The federal government will provide $300 million in financing through TIFIA so 95 Express Lanes can make $5-6 per rush hour commute. 

Circling around, federal TIFIA money can be used for ports.  How might Carlyle lever TIFIA funds in its run on Virginia ports?

Today's TIFIA Interest Rate 2.74% for a 35-year loan as of Thursday, September 6, 2012

PEU's love government funds and state-provided, tax-exempt franchises from Virginia's "mountains, to the prairies, to the oceans, white with foam..."

Update 9-10-12:  Daily Press reported the state hired four consulting firms to help analyze and sell the deal.   They include KPMG, Drewry Maritime Advisors, PFM, Rubin Communications, Powell Tate and an Old Dominion University economist.  I'm not sure what poly-consultancy will add to Virginia's cluster PPP.

Bluest of Blue Loves PEU's

President Bill Clinton defended private equity underwriters (PEU's) on Bloomberg TV.  Note the interviewer never broached Clinton's prior role with Ron Burkle's Yucaipa Funds.  Clinton does mention his good friend in the "equity business."  That friend paid Clinton big money to advise Yucaipa. 

Clinton's IRS turned its head on PEU's waving their wand, turning investment fees into carried interest.  Rising Democratic star Corey Booker believes in PEU's, as well.  Red and Blue love PEU's, especially the titular head of the Democratic Party.

With all the talk about a clear choice in this Presidential campaign, the competition is for the right to spend trillions in federal money in ways that benefits friends and supporters.  It's also about hegemony.

PEU's boys win either way.

Carlyle to Jump Start Dividend, RAC's Debt

Reuters reported:

Private equity firm Carlyle Group wants to pay itself a dividend from its UK roadside rescue business RAC a year after buying it, as the company's performance improves on the back of cost cuts, banking sources said on Tuesday.

Carlyle's dividend would come from RAC's adding debt to its balance sheet. This move is aided by improved EBDITA.

Carlyle's attempts to take cash out of RAC could be done either by refinancing RAC's total debt and taking a payment with the extra proceeds raised or by adding on a new tranche of debt for the sole purpose of taking it as a dividend payment.

As for "cost cuts" enabling the move, they came on the back of workers.  Carlyle didn't take on RAC's pension when it paid Aviva £1.0 billion for the firm.  Carlyle put up £380 million in equity and borrowed £620 million.

Reuters stated Carlyle would go from 3.5 EBDITA to total debt to around 5 under the dividend recapitalization.  This would have Carlyle pulling £170 million in cash out of RAC.  That's nearly half of Carlyle's original investment.

Pensionless RAC workers helped Carlyle achieve a 45% return within a year.  They may wish to talk to their Brintons counterparts.  Debt funded dividends may entice public unit holders.  Borrowing from Peter to pay Paul.  That's one element of a Ponzi scheme.

Update 10-4-12:  Carlyle's RAC debt for dividend is bigger at  £260 million.   Carlyle will increase the interest rate on RAC's debt to facilitate the money bleed.

Update 10-28-15:  Carlyle reportedly has a $1 billion bid for RAC from CVC

PEU's Tax Dodge: No Operating Income

Private Equity Underwriters (PEU's) turned operational management fees into carried interest, i.e. capital gains, so they could be taxed a lower rate.  NYTimes reported:

The IRS has known that private equity funds have been doing this for 20 years.

Twenty years ago President Clinton was elected to his first term.  Clinton later appointed Charles Rossott as IRS Commissioner.  In 2003 Charles Rossotti became a Senior Advisor for The Carlyle Group.

PEU's took investor management fees and rolled them into investment fund.  Articles are silent on management fees PEU's charge affiliates. 

Under scrutiny for this practice are:

Kohlberg Kravis Roberts & Co., TPG Capital, Sun Capital Partners, Apollo Global Management, Silver Lake Partners, Bain Capital, Clayton, Dubilier & Rice; Crestview Partners; HIG Capital; Vestar Capital Partners; and Providence Equity Partners.

KKR has ex-RNC Chair Ken Mehlman, while Apollo Global employs Senator Evan Bayh.  Presidential hopeful Mitt Romney founded Bain Capital, while the Obama White House regularly hosted Silver Lake's Glenn Hutchins, who knows the place having worked in the Clinton White House.

Carlyle Group Sinks LifeCare?

Nearly seven years after purchasing LifeCare Hospitals, The Carlyle Group indicated the hospital company may not be worth saving.  Carlyle's long term ownership may well be toxic:

Pending finalization of a strategy to deal with our debt structure, we have determined that it will be in the Company’s best interest not to pay the next interest payment due on August 15, 2012 under our senior subordinated notes in the amount of $5.5 million. The failure to make this payment will not constitute an event of default under the indenture governing the senior subordinated notes until the expiration of the 30-day payment grace period on September 14, 2012. The failure to make the senior subordinated notes interest payment prior to the end of such grace period would result in an event of default under our senior secured credit facility. The occurrence of an event of default under these agreements could permit the holders to accelerate such indebtedness.

As a consequence of our decision to take advantage of the grace period under the senior subordinated notes indenture, we currently do not meet the conditions to drawing under our revolving credit facility should we have any availability thereunder. Nonetheless, we have a cash balance in excess of $25.0 million as of the date hereof. This amount, together with cash from operating activities, is sufficient to meet our obligations arising in the ordinary course of business, absent an acceleration of our indebtedness due to an event of default as discussed herein.

Carlyle purchased LifeCare on August 11, 2005, just weeks before Hurricane Katrina sideswiped New Orleans.  LifeCare had 25 patients die in their unit within Memorial Medical Center.  Oddly, the hospital with the highest death toll warranted not one mention in the Bush White House Lessons Learned Report, authored by Frances Townsend.  As an administrator who endured in a Southwest Virginia flooded hospital and evacuated a Texas Gulf Coast hospital before a record hurricane, I found the Bush omission disturbing. 

What could sink LifeCare in September 2012?  It looks like a combination of events.  The first is LifeCare's burgeoning debt load and interest payments. Carlyle loaded LifeCare up with $400 million in debt upon purchase, then grew the debt to $465 million in Q2 2012.

LifeCare was virtually debt free before Carlyle, paying a mere $649,000 in interest expense in pre-PEU 2005 .  LifeCare's interest expense for 2012 is a projected $70 million, given interest expense of $35 million for the first six months.  S&P rated LifeCare a "B" in 2006, lowering it to "D" recently.

Note how Carlyle fails to claim responsibility for putting LifeCare in a precarious position:

Given our current capital structure and operating cash flows, it is unlikely that we will be able to refinance, purchase or defease the senior subordinated notes by May 15, 2013. As a result, our senior secured credit facility and revolving credit facility are reflected as current liabilities as of June 30, 2012. Additionally, an event of default will occur under the indenture governing the senior subordinated notes in the event the senior secured term loan credit facility maturity is accelerated. Accordingly, we have also classified the senior subordinated notes as a current liability as of June 30, 2012. In light of these circumstances, on May 8, 2012, we engaged Rothschild, Inc. as a financial advisor to assist us in evaluating strategic alternatives for our capital structure as it relates to the pending maturity of our senior subordinated notes and the potential accelerated maturity of our senior secured term loan.

Carlyle makes money directly off LifeCare via management fees and refinancing charges.  It can also profit by betting on the company's debt.  Carlyle funds investing in the credit market are not required to publicly disclose their holdings.  How many trade LifeCare's Level 2 debt?

LifeCare's Senior Secured Credit Facility and the Senior Subordinated Notes are traded in private institutional markets. The carrying amounts of the Senior Secured Credit Facility and the Senior Subordinated Notes were $320.5 million and $119.3 million, respectively, at June 30, 2012. Using available quoted market prices, the fair values of the Senior Secured Credit Facility and the Senior Subordinated Notes were approximately $294.8 million and $62.6 million, respectively, at June 30 2012. 

The market considered LifeCare's Subordinated Notes junk, prior to missing the interest payment.  It valued the debt at 52 cents on the dollar.

While Rothschild strong armed creditors, Carlyle continued the big money boy game.  LifeCare spread a quick $100,000 around to its new Chief Operating Officer before missing their interest payment 

Sign On Bonus. LifeCare will pay a $100,000 sign-on bonus on the later of July 1, 2012, or the date that Employee completes ten days of employment under this Agreement. 

Ten days of work for $100,000?  That's the PEU way.  Greed will be the death of healthcare.

Private Equity Sharks

TIME designated Summer 2001 in honor of the Shark.  Private equity underwriters (PEU's) managed $750 billion in assets at the end of 2001.

For the last decade PEU sharks hunted for companies.  By 2007 they were in a full-out feeding frenzy.  At the end of 2011 PEU's had $3 trillion in assets under management.

That's 300% growth in AUM over a decade, which means more financial sharks are in the water.  2012 is the Year of Dividend Bleeding for PEU Chums.

 

Any Sheriffs hunting PEU sharks are "gonna need a bigger boat." It seems one may be up for the task.

Summer of Liquidity Recaps in Year of PEU Dividends

The Deal reported:

With so many big recaps in the mix, 2012 has been the year of the dividend for PE firms. Consider that as of Aug. 10 Standard & Poor's Leveraged Commentary & Data has tracked $13 billion of dividends financed with leveraged loans, versus $18 billion of equity invested in new leveraged buyouts. That means that sponsors collectively have withdrawn 72 cents of dividends for every dollar of fresh capital they've invested in a new LBO (again, this is for deals backed by leveraged loans). Said another way, 43% of PE capital flow has been out of issuers via dividends -- surpassing the prior high of 33%, from 2010.

Private equity Underwriter (PEU) driven liquidlty recaps are like home equity loans, where proceeds go into the owner's pocket and not into improvements.

There have been 52 dividend deals alone so far this year through which PE firms have extracted 60% of their original capital commitment, on average.

Every time interest expense goes up, how many jobs are eliminated?  It's but one strategy in the PEU monetization game.

Update 9-4-12:  The Carlyle Group wants a liquidity recap for RAC, a British roadside assistance company.  Carlyle took over RAC sans pension. It looks like Carlyle wants to pull $300 million from RAC via a special dividend, debt funded.