The Blackstone Group L.P.'s (NYSE: BX) stock is down from about $25 to under $10 during the last 52-weeks. No wonder. It does deals like buying Hilton Hotels According to The Wall Street Journal, "The $26 billion leveraged buyout of Hilton Hotels Corp., with its 2,900 hotels and 490,000 rooms throughout the world."
Travel is likely to be way, way down during the recession.
But, the news has broader implications than that. Most LBOs are done with heavy debt, usually borrowed from major banks. Often that debt carries high interest rates to account for risk. In a slowing economy, a lot of that debt will default. Companies which were taken private will end up in Chapter 11, especially those which depend heavily on consumer spending.
That brings the issue around to bank earnings in 2009. While write-offs for mortgage-backed paper may be improving somewhat, a wave of LBO defaults are likely to hit money center banks hard. More losses, more need for capital.
The Treasury may not be done handing out money yet. Another wave of trouble for banks is just around the corner.
Douglas A. McIntyre is an editor at 247wallst.com.
Nuclear power is on the comeback trail
Apple backs AT&T in continuing spat with Verizon
Closing Bell: The recession is still over, still... do you feel it?
Reader Comments (Page 1 of 1)
11-06-2008 @ 3:33AM
Theo O'Brien said...
I had not seen Blackstone's latest deal til now but I think the only really risky aspect of buying Hilton is relying primarily on leverage. Committing this much to the deal is fine for a long-term plan based on turning around Hilton Hotels (potentially very profitable for Blackstone) but with a LBO like this Blackstone could have to produce returns quickly to satisfy the banks that loaned to them. Which makes buying a company that relies on a strong economy kind of puzzling. I doubt that Blackstone will get returns from Hilton as quickly as they need to satisfy their own commitments to investors and lenders, especially when in the short-term Hilton won't improve too much--if at all. Risky bet for Blackstone.
Theo O'Brien
http://PrivateEquityBlogger.com