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Howard Marks, of Oaktree Capital, is one of the world's most famous investors. Partly because of its track record in the world of high yield bonds, and partly because of its thoughtful investor memos.
His latest publication, "The Seven Most Terrible Words in the World," was published last week and concerns what Marks sees as an increase in market transactions, which sums up the worrying phrase: "Too much money to looking for too few agreements ".
Part of the note in particular caught the reader's attention in the Long Room:
Moving from the general to the particular, I interviewed Oaktree's investment professionals. . . for their candidates for imprudent transactions they have seen. Here is the proof they provided of a fiery capital market and a strong appetite for risk, their comments being in quotation marks in some cases. (As my son Andrew often reminds me of Warren Buffett's warning, "praise by name, category review," I will not identify the companies involved.)
Brands refuse to name and shame the careless parties. So we thought we would try to solve these mysterious cases ourselves. So, after putting on our deerstalker hat, we have proposed the following, with some names missing or unclear (any help is welcome in the comments below).
First of all:
Capital Equipment Company A debt issued to finance its acquisition by a private equity fund. "We thought the initial price was far too tight, but the deal was oversubscribed and overvalued, and the price was tightened by 25 basis points. The final terms were very aggressive with a covenant-lite structure, uncapped ebitda adjustments and a large borrowing capacity. The company missed expectations in the first two quarters after the show, in reaction to the reduction of the first lien loan. five points and high yield bonds were traded up to 15%.
A little scum in the head this one. High yield bond traders can instantly recognize the price action, but we are not wiser. Tell us if buybacks of light wedding rings come to mind.
Here is the second offender from Marks:
The European market is not isolated from the generosity trend. Company B is a good service company, although it is exposed to cyclical end markets; is smaller than his peers; has lower margins, greater leverage and limited cash generation capacity; and went through a restructuring a few years ago. Nevertheless, thanks to an adjusted ebitda equal to 150% of the published figure, the company was able to issue seven-year bonds at a rate slightly above 5%.
That seems to be CEVA Logistics, which sold a € 300 million seven-year bond at a 5.25% rate of return in July, with the adjustments increasing its EBITDA from 197 to € 292 million.
At the third:
Energy Products Company C recently went public. Despite an unutilized $ 2.4 billion deficit and an S-1 showing "we have suffered significant losses in the past and we do not expect to be profitable in the near future", its shares have been oversubscribed at the IPO's price and currently sell at 67% higher. . An equity analyst believes this is a reasonable estimate, as its revenue is estimated at five times that of 2020. Another has a target price 25% lower than the current price, but to arrive at this valuation, the analyst assumes that the company will be able to increase its gross margin by 30% per year for the next 12 years and to be valued at 6x EBITDA in 2030.
Identified by the reader, Mr Dice, it seems to be Bloom Energy, a clean energy unicorn floated on the Nasdaq stock market in July, which raised $ 240 million. Its shares are now up 115% from its initial listing price of $ 15.
Following:
In the last two years, Company D has spent an amount equivalent to 85% of year repurchases. Partly because of redemptions, the company now has a lot more debt than it did two years ago. Unlike the last two years, we estimate that in the past seven years, she has spent a tenth less in redemptions than the last two, at an average purchase price lower than 85% above average. recent.
Marks did not give us much work with us. Our minds immediately turned to US companies with large buyout programs – Oracle, Boeing, Cisco – but none of them matched their profile perfectly. Restoration Hardware, the $ 2.8 billion home furnishing company that just bought $ 1 billion, was another idea, but its share price has not increased 10 times in the last five years.
Forward:
A repurchase fund has just bought the company E, a formidable company, at a price of 15x ebitda, a very high "global figure". The price is based on adjusted EBITDA, which corresponds to 125% of published ebitda; thus, the transaction price equals 19x reported ebitda. The indicated lever is a 7x adjusted ebitda, which means 9x a reported ebitda. "We are not saying that it will end up being a bad deal. Suffice it to say that if it ends up being a bad deal, no one will be surprised. Everyone will say, with hindsight, "they have paid too much and have incurred too much debt in the balance sheet, and it has been condemned to disappear."
Another difficult to identify. Our best guess is the fast-food chain Sonic Corp, which launched private Inspire Brands early last week (two days before Marks memo), for a cost of $ 2.3 billion, a multiple of 15 times the amount of Ebitda. The Inspire brands mostly belong to Roark Capital, a private equity fund named after the main character of Ayn Rand's novel, The Fountainhead.
Following:
Company F earns a substantial ebitda, but 60% comes from a single unreliable customer and its growth is limited by geography. We arrived at a price where we thought it would be a good investment for us. But the owners wanted two more times. . . and they got it from a buyout fund. "We generally find that the lenders are very aggressive: they set their prices perfectly with very little margin of error, because of the very liberal lending practices of banks and non-traditional lenders. We all know how it will end. "
Come on Howard, give us a little more data point here! A company with a single big customer and geographic constraints can make you think of a widgets manufacturer from a larger local supply chain – say for a German automaker – but, to be honest, this one could be a good one. to prove one step too much. Even for the best detectives on the market.
The following is a little easier:
A year ago, a buyout fund financed 100% the acquisition of the company G by one of the companies in its portfolio and subscribed a dividend. The transaction was commercialized with an adjusted EBITDA representing 190% of the EBITDA announced by the company. Based on the adjusted figure, the total leverage was greater than 7x and, based on the figure, 13.5x. Bonds are now trading above par and yield spread at worst on early lien notes is less than 250 basis points.
That can only be the case with Avantor, whose takeover financed by the debt of VWR, a much larger partner, has allowed the pharmaceutical group to leverage which would make the application of more than 1, $ 4 billion in dividends to New Mountain Capital. The private equity firm is headed by Steven Klinsky, one of the founders of Goldman's LBO division in the speculative bond boom of the Milken era, and his investment bank alma mater has got a nice piece of the deal: Goldman has unlocked billions of dollars from Avantor. favorite stock.
And finally, an Oaktree affair directly benefited from:
The H company is a good growing company that we were ready to leave and our bankers sent 100 "teasers". We received 35 brands of interest: three strategic buyers and 32 financial sponsors. Strategic buyers offered the lowest valuations. ; it is always a great warning sign when financial promoters who have no hope of synergy offer prices far superior to the strategies. We received four bids from repurchase funds, including one with the price left blank. We ended up selling at 14x ebitda, with a total leverage of more than 7x.
After carefully reviewing the dozens of private equity investments listed on the Oaktree website, we believe that Marks discusses one of three transactions. It could be either a) January purchase of French beauty company Axilone by CITIC Capital b) Oaktree's sale of the SACO serviced apartments company to Brookfield Asset Management for £ 430m in February or c) buyout fund Acquisition of Cyanco by Cerberus Capital Management also in February.
It seems that Marks kept this one particularly vague so as not to upset an old holding company or a future counterparty.
Let us know if you have an idea about companies A, D or F (or if we are mistaken about others). Good hunt.
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