The Wall Street Journal’s Deal Journal quoted veteran deal hand Steve Rattner, now DLJ’s head of merchant banking, taking a comparatively upbeat view of the difficult conditions in the LBO market:
Yes, “the oversupply is the worst we’ve ever seen,” said Rattner, whose private-equity fund closed last year with $2.1 billion of capital. “The market is panicked. How do you get that much paper through a market that’s not historically been able to absorb that much?”
But Rattner makes a simple, crucial point. “This is an issue of oversupply, not of credit.”
The current turmoil should be viewed “as the difference between price. Not of credit. It’s because of the oversupply, not because any individual credit is overlevered or impaired.”
“The vast, vast majority of these deals are sound. The banks are in scramble mode because they have an awful lot of inventory to get off their books. But they are comfortable with the loans they’ve written.”
How long will it take to work its way through the system, and for new deals to get struck? “Six months or longer,” says Rattner. “It’s the pig in the python.”
It turns out another Steve Rattner, head of private equity firm Quadrangle Partners and former Lazard partner, was quoted by Reuters in April:
Rattner said the world economy will not always grow at 3 percent, and that when it slows, some leveraged buy outs are going to end up in trouble.
“I still think it is an accident waiting to happen,” Rattner said. “Of all the bubbles, the bubble in the credit market today is one of the greatest — it is beyond any rational measure.
“Frankly, we are all feasting off the imprudence of our lenders. They are subsidizing our transactions and are allowing us to make deals that wouldn’t have made any sense.”
And the Quadrangle Rattner wrote an op-ed piece for the Journal, “The Coming Credit Meltdown” in June which said:
The subprime mortgage world has been reduced to rubble with no lasting impact on another, larger, credit market dancing on an equally fragile precipice: high-yield corporate debt. In this fast-growing arena of loans to business — these days, mostly, private equity deals — lending proceeds as if the subprime debacle were some minor skirmish in a little known, far away land.
How curious that so many in the financial community should remain blissfully oblivious to live grenades scattered around the high-yield playing field. Amid all the asset bubbles that we’ve seen in recent years — emerging markets in 1997, Internet and telecoms stocks in 2000, perhaps emerging markets or commercial real estate again today — the current inflated pricing of high-yield loans will eventually earn quite an imposing tombstone in the graveyard of other great past manias….
But to think that corporate recessions — and the attendant collateral damage of bankruptcies among overextended companies — have been outlawed would be as foolhardy as believing that mortgages should be issued to home buyers with no down payments and no verification of financial status.
And just as the unwinding of the subprime market occurred at a time of economic prosperity, the high-yield market could readily unravel before the next recession. With the balance sheets of many leveraged buyouts strung taut, a mild breeze could topple a few, causing the value of many leveraged loans to tumble as shaken lenders reconsider their folly.
So in April and again in June, Rattner warned not simply that lenders to private equity deals were being too generous with credit, but also that some transactions would come a cropper because the cheap credit encouraged the LBO players to do dicey deals.
Now it is September, the credit markets are contracting on multiple fronts, which is likely to slow the real economy. The downside scenario Quadrangle Rattner was worried about is playing out on an accelerated schedule. Yet DLJ Rattner tells us this is just a temporary oversupply problem and the deals are just fine.
When you run your own firm you can afford to be candid; when you are part of a big firm, you have to toe the party line.
Update 9/8, 3:00 PM: The original version of the post incorrectly treated the two Rattners as being the same person. Big mistake, and apologies to the ex-Lazard, now Quadrangle Rattner, who has been an active spokesman for some time.
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I think there are two Steven Rattner’s. One at Quadrangle who worked at Lazard and went to Harvard and the other who works at DLJ and went to Franklin and Marshall. Here are links to BIOS:
Rattner DLJ: http://www.csfb.com/investment_management/private_equity/DLJ_mb_partners.shtml
Rattner Quadrangle: http://www.quadranglegroup.com/rattner.html
It is quite clear from the pictures that they are different people.
I tend to agree with the Quadrangle Rattner as opposed to his namesake. I think it is worth clarifying the post because Quadrangle Rattner has generally been a good-faith commentator.