Canaccord upgraded Rio Tinto (NYSE: RTP) to Buy from Hold citing valuation following the severe price decline following BHP Billiton's (NYSE: BHP) dropped bid.
UBS upgraded Itron (NASDAQ: ITRI) to Buy from Neutral citing valuation and defensive business mix.
Jefferies upgraded shares of HealthSouth (NYSE: HLS) to Buy from Hold on valuation and maintains a $13.50 target.
Merrill downgraded Campbell Soup (NYSE: CPB) to Neutral from Buy and expects marketing and promotional spending to limit earnings growth in 2009 and 2010. The firm lowered their target to $35 from $42.
Mechel Steel (NYSE: MTL) was cut to Underweight from Equal Weight at Morgan Stanley to reflect declining coal demand.
Friedman Billings downgraded shares of Legg Mason (NYSE: LM) to Underperform from Market Perform on liquidity concerns given the Legg Mason's leveraged balance sheet and falling EBITDA. The firm lowered their target to $7 from $11.
Like just about all other private equity firms, Blackstone Group LP (NYSE: BX) reported a horrible Q3, with losses of $502.5 million, or $0.44 per share. However, the firm was fairly optimistic on the overall value of its sprawling portfolio of companies. That is, the writedown was only about 7%.
As a result, some investors were naturally skeptical – and the stock price of Blackstone continued to slide.
Well, this week, the CEO of Blackstone, Stephen Schwarzman, opined on the matter at a Merrill Lynch investor conference. Basically, he was mostly rosy and thinks there are good valuations in the marketplace. But, paradoxically, he said the Blackstone equity portfolio is in good shape.
And, in general, he has a point. If you take a look at the history of private equity, the best investment periods are in tough times (such as the early 1990s and 2001).
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 toThe 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.
It looks like Blackstone Group LP (NYSE: BX) will post its smallest profit since becoming a public company in June 2007.
Simply put, the firm relies on transactions -- which have ground to a halt. As a result, fees are likely to plunge. This is what happened to KKR Private Equity Investors LP, which recently reported 15% write-down of its portfolio.
Keep in mind that Blackstone will also need to come to terms with some mega-deals it struck before the credit crunch hit. An example is the firm's $26 billion leveraged buyout of Hilton Hotels.
True, it's a marquee asset. But the transaction was made when debt was dirt cheap. Blackstone raised about $20 billion in financing for the deal.
Now, with the global economy sliding into recession, it's inevitable that there will be cutbacks in travel.
In February of 2007, Blackstone Group (NYSE: BX) boss Stephen Schwarzman spent $3 million on his own birthday party at the Park Avenue Armory. Patti LaBelle and Rod Stewart (singing 'Reason to Believe' perhaps?) provided the entertainment for the 500 guests.
The lavish excess was ill-timed, as the industry went sour shortly thereafter. A few months after that party, Blackstone went public in the $25 per share range. Now the stock trades at less than $9 and the orgy surrounding Schwarzman's $8 billion cashout helped fuel calls for increased regulation of private equity.
Now Schwarzman regrets the whole thing -- or at least the birthday party. Speaking at a conference in New York, he said that "Obviously, I wouldn't have wanted to do that and become, you know, some kind of symbol of sorts of that period of time. Who would ever wish that on themselves? No one."
Indeed. Who would ever want to become a symbol of having enormous amounts of money? How awful.
When the global markets entered the credit crunch, sovereign wealth funds (SWFs) funneled billions of dollars into a variety of struggling companies, especially financial institutions like Citigroup (NYSE: C) and Merrill Lynch (NYSE: MER).
Alas, the transactions have shown tremendous losses.
True, SWFs are focused on the long-term, which may extend into decades. But the extent of the losses were certainly jarring.
So are SWFs backing off? Perhaps not. In fact, these funds are starting to write checks again. For example, the Qatar Investment Authority structured a $8.83 billion dollar capital infusion into Credit Suisse Group (this is according to the Wall Street Journal, a paid publication).
Interestingly enough, China Investment Corp. may even pony up more money into the Blackstone Group LP (NYSE: BX), even though it has sustained losses of more than 70%. The SWF now has the right to boost its equity stake from 9.9% to 12.5%.
While it's true that SWFs tend to invest early, the recent activity is nonetheless encouraging – and another sign that major investors are getting more and more confidence.
Lately, there have been signs that private equity powerhouses are getting push back from investors. Look at the Blackstone Group LP (NYSE: BX). In the raise of its latest fund, California State Teachers' Retirement System (Calstrs) invested a mere $250 million. Keep in mind that the pension invested $1.7 billion in Blackstone's prior fund.
However, not all private equity operators are having trouble. Take TPG Capital. The firm is apparently in the process of scooping up $30 billion (this is according to The Wall Street Journal). In fact, about $20 billion will be allocated to TPG's leveraged buyout fund. Who said buyouts are dead?
So why the optimism? Part of it is timing. After all, TPG started its capital raising process earlier.
Another key reason is that TPG has a stunning track record. Since 1985, the internal rate of return is roughly 55% (yep, this is something to get investors excited about).
With depressed markets, it would seem that private equity funds have many opportunities to pickup some good investments at compelling valuations. In fact, this environment seems particularly good for top-tier operators, such as TPG, KKR and Blackstone Group LP (NYSE: BX).
Well, perhaps not.
For example, according to a piece in the Wall Street Journal (subscription required), Blackstone will likely snag a mere $250 million form the California State Teachers' Retirement System (Calstrs) for its next fund. Keep in mind that Calstrs pumped in $1.7 billion in the prior fund from Blackstone.
Is this a sign of a chill? Of course, we won't know for awhile. But, Calstrs is influential. Besides, pensions are probably getting a little edgy as the credit crunch is still in effect.
Although, another concern may be that Blackstone is now a public company. As a result, there is less confidentiality and maybe even more conflicts. For instance, may a private equity fund cash-out of a deal too soon so as to meet the quarterly earnings expectations?
If so, this could be bad for other private equity firms planning to become public, such as Apollo and KKR.
TheStreet.com's Jim Cramer says the only action in the sector is that the rumor mill is spinning overtime.
There are tons of ridiculous stories that can be written in the Naked City. Notice that every day we are blessed with a story about how there are three private-equity firms examining Lehman Brothers (NYSE: LEH) (Cramer's Take) and Neuberger Berman (NYSE: NEU) (Cramer's Take). I think I have read that story a dozen times now.
You can list them, too: Blackstone (NYSE: BX) (Cramer's Take), KKR (NYSE: KFN) (Cramer's Take), Apollo (NASDAQ: AINV) (Cramer's Take), maybe Cerberus. What are they going to do, deny it? "No, we are not looking at it?" Their investors would love that: "Well what the heck are they doing with our money?" would be the reaction of investors if they issued denials. I predict weeks more of phantom tire-kicking of Lehman by nonexistent private-equity firms.
How about private equity about to swarm over collateralized debt obligations? Usual cast of characters there. Right? Come on, those stories are a penny a dozen. Every day I read about them. But nobody, other than Lone Star, is doing anything, anything at all on this front. If there were buyers, you can bet that Lehman and AIG (NYSE: AIG) (Cramer's Take) wouldn't be in the woods, lost, hopeless, with tons of bad European paper.
Lehman Brothers Holdings Inc. (NYSE: LEH) is poised to lose $2.6 billion and it's trying to dump $40 billion worth of real estate from its books. The Wall Street Journal reports that Guy Moszkowski, a Merrill Lynch & Co., Inc. (NYSE: MER) analyst thinks Lehman could lose $2.6 billion -- while others expect a mere $1.8 billion loss. Lehman normally reports in mid-September but it may pre-announce earnings this month.
I always find it interesting when analysts -- particularly those who work for banks with their own problems -- offer bearish earnings outlooks for their competitors. But I have met Moszkowski and I found him to be both very smart and a straight shooter. The Journal reports that he "more than doubled his loss projection to $2.6 billion and predicts that Lehman will take a $4.5 billion hit from write-downs." It quotes him as saying that an additional markdown up to 20% related to Lehman's remaining $64 billion in mortgage and commercial real-estate exposure "seems like a lot but can't be ruled out." If that were to happen, Lehman might need to raise more capital.
Speaking of that real estate, FT.com reports that Lehman is in talks to dump $40 billion worth of commercial real estate assets and securities. FT.com reports that there is a wide gap in what the potential buyers -- Blackstone Group (NYSE: BX) and BlackRock (NYSE: BLK) -- and Lehman think those assets are worth. It also reports that the assets in question consist of mortgages and mortgage-backed securities that Lehman valued at $29.4 billion at the end of May and real estate assets then valued at $10.4 billion.
According to the Blackstone Group LP (NYSE: BX) conference call, it appears that the buyout market is getting somewhat better. For example, in Q2 the firm struck deals like the purchase of the The Weather Channel.
Despite all this, things are still far from good. In fact, Blackstone predicts that the slowdown will continue into 2009 and perhaps 2010. Actually, it looks like the problems are slipping over into Europe and even Asia.
So it should be no surprise that Blackstone's recent financial results are fairly lackluster. The firm posted a net loss of $156.5 million, or $0.60 per share, which compares to a profit of $774.4 million or $0.20 per share in the same period a year ago. Revenues plunged 63% to $353.7 million. Of course, the main reason is that Blackstone hasn't had opportunities to exit investments from its portfolio.
However, Blackstone believes there are juicy investment opportunities. For example, the firm's credit-focused hedge fund, GSO Capital, is investing in distressed debt and even providing financing for Blackstone buyouts. Interestingly enough, the alternative asset management segment saw a 34% spike in revenues to $225.2 for Q2.
Some other good news: Blackstone is still collecting large amounts of assets. So far, the amount is about $113 billion, providing the firm with lots of power to capitalize on things.
When the Blackstone Group LP (NYSE: BX) went public a year ago, the Chinese government invested $3 billion in the firm. No doubt, this was a sign that Blackstone was ready for lots of dealmaking.
But so far, things have been underwhelming. One of the deals was for a mere $600 million for a 20% stake in China National Bluestar Corporation (a chemicals company). There was also the $160.7 million purchase of a commercial building in Shanghai.
However, Blackstone isn't giving up. In fact, today the company announced the opening of its Chinese office in Beijing. The chief of the operation will be Fu Shan who was formerly the VP of Beijing Mainstreets Investment Group Corporation (which focuses on real estate deals). He also has extensive background with governmental divisions, such as the National Development and Reform Commission (NDRC).
Blackstone realizes that China requires more than just money and deal structuring. There needs to be staff that has deep experience in dealing with the intricacies of the country. Even with this, the dealmaking is still likely to be a slog.
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Analyst upgrades:
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Big 3 CEOs drive to Washington to suck up to Congress
GM and Ford ready weak pitches for taxpayer bucks
Cramer on BloggingStocks: A troika of opportunity and trouble 
