A cautionary tale

Posted by Morgan on 4th Mar 2009
In April 2008 Blackstone bought a package of leveraged loans from my old muckers at Deutsche Bank. This was one of the early distressed sales and Blackstone were buying at a significant discount to par. At the time discounted debt was considered to be the new sexy investment opportunity.

It was revealed yesterday that Blackstone have written off this investment in their 2008 year end accounts. They have had three problems with their investment; the price (value) of debt in the secondary market continues to fall, the credit performance of the underlying companies, funded by these loans, continues to detrioate  and the acquisition of the loan portfolio was over leveraged.

The FT reports a peer of Blackstone's as commenting that the acquisition was "too early, too concentrated and too leveraged."

This portfolio was made up of leveraged loans, both senior and mezzanine. There is greater transparency and liquidity in this market that there is in the world of real estate finance and even direct real estate but the principles above still apply.

How many real estate investors went too soon and bought assets in 2008 that looked cheap compared to 2006 / 2007 but not look disatorous? We know that there are a list of candidates but as yet there is insufficient transparency, liquidity and disclosure to reveal who entered 2008 with cash and are exiting significantly less wealthy or even bust. The cautionary tale is if it can happen to a sophisticated investors like Blackstone and Warren Buffet it can happen to anyone - calling the market too soon is an easy mistake to make but can be just as disatorous as buying at the peak.

Another interesting side affect of this story is that the bank who sold the portfolio, in this case DB, thought they had disposed some of their exposure to distressed assets. However, through providing ongoing leverage as asset values fall they find themselves back on the hook. So much for cleaning up their balance sheets...

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