Apollo, Bain LBOs Lose Investors' Money, Bonds Show

(Bloomberg) -- Less than a year after Apollo Management LP paid $6.6 billion for real estate broker Realogy Corp., bond prices show the deal may be worthless.

Debt used to finance the April purchase trades at 61 cents on the dollar, and derivatives tied to the securities indicate an 80 percent chance that Parsippany, New Jersey-based Realogy will default. Apollo, the private-equity firm run by Leon Black, put up about $2 billion of cash to buy the owner of Coldwell Banker and Century 21, borrowing the rest.

The bonds show Apollo's equity in Realogy ``has no value right now,'' said Sabur Moini, a money manager in Los Angeles at Payden & Ragel, which oversees $50 billion in fixed-income securities. ``If bonds are trading in the 50s or 60s, the market is saying that these guys are headed toward bankruptcy.''

Falling bond prices are jeopardizing private-equity returns after easy access to cheap debt fueled a record $1.4 trillion of leveraged buyouts in 2006 and 2007. New York-based Morgan Stanley estimates buyout funds raised in 2003 have returned an average of 42 percent, and now Apollo, Bain Capital LLC, Cerberus Capital Management LP and their competitors may face losses.

Twenty-seven percent of the approximately $74 billion in bonds used in LBOs the last two years classify as ``distressed'' because they yield at least 10 percentage points more than Treasuries, Bloomberg data show.

Distressed Defaults

About 19 percent trade at less than 80 cents on the dollar, below the 91-cent average for high-yield bonds, Bloomberg data show. Freescale Semiconductor Inc., an Austin, Texas-based maker of chips for mobile phones, and OSI Restaurant Partners Inc., the Tampa, Florida-based owner of Outback Steakhouse, are in both categories.

Debt is 20 times more likely to default within a year once it's crossed the distressed threshold, according to research by Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York.

``There's going to be some blow-ups'' as the economy slows, said Eric Bushell, the chief investment officer at Toronto-based Signature Funds, which oversees $17 billion and invests in publicly traded buyout funds. LBO firms ``paid prices that maybe weren't necessary,'' he said.

LBO firms typically seek out investors such as pension funds or university endowments to fund 32 percent of the cost of any buyout on average, according to Standard & Poor's. They borrow the rest through high-yield, or junk, bonds and loans in the target company's name. Junk bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by S&P.

 

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Pfizer, Schering HIV Drugs May Fail On Incorrect Test

(Bloomberg) -- Pfizer Inc.'s new AIDS drug and a similar pill from Schering-Plough Corp. may stop working in some patients because a test identifying who should get the medicines is sometimes inaccurate.

The pills, made by Pfizer, of New York, and Schering, based in Kenilworth, New Jersey, block a chemical entryway known as CCR5 that the virus uses to infect cells. In about 10 percent of cases, a Monogram Biosciences Inc. test incorrectly identifies patients who will benefit from the drug, scientists said this week at an AIDS meeting.

New research on Pfizer's Selzentry and Schering's vicriviroc, as well as the test's reliability, will be presented today at the Conference on Retroviruses and Opportunistic Infections in Boston. While the pills promise to fight HIV in patients who can't take older medicines, the new drugs' effectiveness depends on accurate screening.

``The test is wrong in about 8 to 10 percent of patients initially screened to see if they are candidates for a CCR5 antagonist,'' David Hardy, director of the division of infectious disease at Cedars Sinai Medical Center in Los Angeles, said in a telephone interview. ``We're waiting to see if the next-generation test from Monogram will eliminate the errors.''

Selzentry was cleared in August for patients who stopped responding to older medicines. It's the only approved CCR5 inhibitor, the first new family of AIDS medicines in a decade.

Pfizer didn't report revenue for Selzentry last year. Analysts have projected the pill could have peak annual sales of about $300 million. Vicriviroc, a similar drug, is in the third and final stage of testing usually required for U.S. regulatory approval.

90 Percent

As many as 90 percent of previously untreated HIV patients will have a strain of the virus that enters healthy cells through the CCR5 doorway, Howard Mayer, executive director of clinical research and development for Pfizer, said in an interview at the meeting in Boston.

After five years of HIV infection, about half of patients still have that strain, Mayer said. By then, most patients have higher levels of another virus version known as X4 that infects cells through a different route unaffected by drugs such as Selzentry and vicriviroc.

A new test to better determine who can benefit from the Pfizer and Schering drugs is about six months from reaching the U.S. market, Chris Petropoulos, chief scientific officer for South San Francisco-based Monogram, said in a telephone interview.

 

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Fillon's SocGen Barricades Prompt Europe Officials to Cry Foul

(Bloomberg) -- As French politicians go to the barricades to keep foreign banks from preying on a vulnerable Societe Generale SA, their European partners are left wondering just who the enemy is.

Days after France's second-largest bank announced that unauthorized bets left it with a trading loss of 4.9 billion euros ($7.2 billion), politicians led by Prime Minister Francois Fillon jumped in to preempt a non-French takeover bid.

Such economic nationalism in a country whose companies remain among the most acquisitive in the region has other Europeans crying foul. In the past year, French firms announced 317 deals in Western Europe, outside France, valued at $89.2 billion, according to Bloomberg data. In the same period, Western European businesses initiated 286 deals in France for $67.2 billion.

Whenever a potential acquisition is considered politically important, ``it is always seen in Paris as the French versus the non-French,'' says Daniel Gros, director of the Brussels-based Center for European Policy Studies. ``There is no European solidarity.''

Jean-Claude Juncker, the Luxembourg prime minister and finance minister who heads a group of his euro-area finance counterparts, said he can understand blocking a hostile bid.

``But if someone friendly comes forward with a strong economic project, why refuse it?'' he asked on Europe1 radio Jan. 31. ``Simply because it is not French?''

`Great French Bank'

Fillon, 53, provided an answer in remarks to Parliament Jan. 29. ``Societe Generale is a great French bank and will remain a great French bank,'' he said.

That sentiment is widely held.

``For the French, it is extremely important that one of our oldest banks, with a 140-year history, which was founded by its employees, not by a family, which has never been subsidized by the state, remain in French hands,'' says Patrice Leclerc, head of Societe Generale's employee-shareholders' association.

The protectionist instinct is deep-seated and draws from a political tradition that dates back to the 17th century mercantilist policies of Jean-Baptiste Colbert, Louis XIV's finance minister. Colbert established a protective system of tariffs, preventing foreigners from trading in French colonies.

All countries seek to protect strategic industries, as the U.S. did in 2005 when it blocked the sale of California-based oil company Unocal Corp. to Chinese oil producer Cnooc Ltd.

Special Protection

France's definition, though, is wider than most: In July 2005, rumors of a takeover of Groupe Danone SA, the world's largest yogurt maker, by Purchase, New York-based PepsiCo Inc. set off a national uproar. Then-President Jacques Chirac called for special measures ``to protect our key companies.'' PepsiCo, the world's second-largest maker of snacks and beverages, never made a formal bid.

``France is not unique,'' says Juan Delgado, a fellow at Breugel, a Brussels-based research institute. ``It is just that the French are noisier and more blatant.''

One explanation is the size of the French government's stake in the economy. It owns more than 80 percent each of Paris-based Gaz de France SA, owner of Europe's largest natural- gas network, and Electricite de France SA, the region's biggest power generator.

``There is often no clear division in France between the political and the economic, between a company's strategy and that of the state,'' Delgado says. While EDF frequently makes acquisitions outside France, no foreign company would be able to buy it because of the government's stake, he says.

 

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CDO Ratings to Fall as Losses Trigger Fitch Overhaul

(Bloomberg) -- Fitch Ratings may downgrade $220 billion of collateralized debt obligations as mortgage-related losses increase.

The New York-based company may lower the securities by as much as five levels after failing to accurately assess the risk of debt that packages other assets. CDOs with AAA grades that are based on credit-default swaps and aren't actively managed may face the steepest reductions, according to guidelines proposed by Fitch today.

Ratings firms are responding to criticism that they failed to react quickly enough as rising defaults on subprime mortgages in the U.S. caused a plunge in the value of CDOs. Fitch, a unit of Fimalac SA in Paris, lowered $67 billion of mortgage-linked CDOs in November, slashing some AAA debt to speculative grade, or junk.

``Fitch is acknowledging that it was overly optimistic in its default rate and other assumptions in its original CDO methodology,'' said Christian Stracke, an analyst at bond research firm CreditSights Inc. in London.

Moody's Investors Service last year downgraded $76 billion of CDOs and began this year with $185 billion of deals under review. The New York-based company said yesterday that it may overhaul its system for evaluating structured-finance securities, proposing options including a numerical scale and a designation of ``.sf'' to differentiate a structured-finance ranking from a corporate credit grade.

Ratings Challenge

Standard & Poor's, the New York-based unit of McGraw-Hill Cos., downgraded or placed under review $98.3 billion of CDOs last month, citing ``stress in the residential mortgage market and credit deterioration.''

Fitch's review of 600 CDOs referencing company debt and derivatives doesn't cover structured-finance notes, which package asset- and mortgage-backed securities. It plans to introduce the new criteria by the end of March after seeking feedback.

Fitch wants to ``challenge existing CDO rating assumptions,'' John Olert, head of global structured credit at the ratings firm in New York, said in a statement. The company wants to ``produce ratings that perform similarly in terms of default risk and ratings migration with the market's expectation for other asset classes,'' he said.

CDOs are securities that repackage pools of bonds, loans and credit-default swaps and slice their cash flow into notes of varying risk and returns that are sold to investors. Junk bonds are rated below Baa3 by Moody's Investors Service and lower than BBB- by S&P.

 

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