Private equity takes on $8bn in RBS loans

By Henny Sender in New York

Published: August 10 2008 22:39 | Last updated: August 10 2008 22:39

Leading private-equity firms are highlighting their transformation into investors in deeply discounted debt as they purchase more leveraged buy-out financing from banks.

In the most recent deal, Royal Bank of Scotland is selling to Apollo, GSO Capital, Blackstone’s debt investing arm, and TPG as much as $8bn (£4.2bn) in loans that financed acquisitions by private-equity firms, people familiar with deal said. RBS did not respond to requests for comment.

The buyers of the loans could make returns of up to 30 per cent, given the markdowns on the sale prices, said Tony James, president of Blackstone. Such deals often involve attractive financing terms – with banks lending 80 cents on the dollar in most cases.

Apollo and GSO also have bought $5bn of debt from RBS, Credit Suisse and Deutsche Bank that together financed the recently re-worked buy-out of Clear Channel, the US radio station owner, by Bain Capital and Thomas H Lee.

More large sales of leveraged loans from last year – such as debt financing Cerberus Capital’s purchase of Chrysler and Terra Firma’s buy-out of EMI – are less likely because potential buyers want bigger discounts, market participants say.

Private-equity firms are seeking high returns from deeply discounted debt because turmoil in the credit markets has made it difficult for them to borrow enough money to do big buy-outs. Including the most recent transactions, Apollo, TPG and GSO have bought $25bn-$30bn in buy-out loans since April.

In addition to investing in debt, GSO is also lending money to Blackstone, so its parent can do leveraged buy-outs, such as the acquisition of Weather Channel. NBC Universal and Bain Capital were Blackstone’s partners on that acquisition.

GSO has given Blackstone a headstart in playing the new debt game, an advantage not lost on its competitors.

Kohlberg Kravis Roberts has been in preliminary talks with potential targets that could give it greater authority in the debt market. Both KKR and TPG, which once flirted with GSO, are also taking on staff.

“Purchasing debt at big discounts is a terrific one-off opportunity,” said Mark Bradley, head of financial sponsors at Morgan Stanley. “But firms like GSO, with their ability to provide all the debt to buy-outs, are going to change private equity in a lasting way.”

Copyright The Financial Times Limited 2008