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Has TPG Credit Uncovered A Loophole To Raid CDO Assets?
Bloomberg highlights an interesting development out of CDO land, where TPG Credit is in the process of attempting to raid quality assets in a TRuPs CDO at the rip off price of 5 cents on the dollar, while bribing the first loss tranche: the CDO equity holders, with a moderate take out fee. If this is a broad loophole in which the equity tranche, which in most cases is out of the money since even the highest-rated slices are trading at 40-50 cents on the dollar in most CDOs, can determine the fate of CDO dispositions, expect many other funds to join TPG in raiding any and all good assets making up comparable CDOs. As there is roughly $650 billion in CDOs outstanding, they have quite an extensive selection to pick and choose from.
From Bloomberg:
A TPG Credit Management LP fund offered Oct. 9 to buy $115
million of bank trust preferred securities for 5 cents on the
dollar from Tropic CDO V Ltd., according to a trustee report
obtained by Bloomberg News. TPG Credit will pay holders of so-
called equity portions another $5.75 million to allow the sale,
the document says. Equity holders have the right to decide which
assets the CDO sells because they’re first in line for losses.
Tropic CDO V’s equity holders may no longer have the
incentive to ensure that assets are sold at fair value because
their investments were wiped out by the worst financial crisis
since the Great Depression. That may allow TPG Credit, a
Minneapolis-based firm founded by former Cargill Inc. executive
Rory O’Neill, to cherry-pick the best assets and erode senior
holders’ collateral, according to John Scannell, chief operating
officer of New York hedge fund Hildene Capital Management LLC.
In essence TPG is providing tip value to the decision makers who don't care either way what the fate of the asset below above them is, so long as they get even minor compensation for an investment that had been previously considered a total loss. In this light, it is easy to see why holders of higher-rated CDO tranches should be very concerned about the confiscation of their collateral at bargain basement prices:
“The 5 percent offer per security seems low and likely
counter-beneficial to all or almost all noteholders in the deal,
with the possible exception of the equity investors,” Gene
Phillips, a director at advisory firm PF2 Securities Evaluations
Inc., said in an interview from his New York office. “If this
were allowed to go through, it would seem to be against the
spirit of the deal, which aims to protect the senior
noteholders.”
As the administration is doing all it can to rekindle the securitization market, this should be a big flashing light: the last thing needed is investors figuring out how to abuse comparable loopholes not only in the existing securitization universe but also for any such planned offerings in the future. And without some form of securitization vehicle coming to the rescue of CREs over the next 2-3 years, look for the loans we discussed earlier which banks have on their books still at 95 cents and above to turn very ugly quick.
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Rosie on Bloomberg at 330 edt today
pigs get slaughtered
pigs get fat. hogs get slaughtered.
Too bad it's not publically traded. This is change you can believe in.
Give the man and others like him (Paul, Schiff, etc.) a couple bucks.
On the campaign trail here in Northern New Mexico, I have discovered a great opportunity to talk about the principles of liberty as applied to monetary and economic theory. Everybody in America today can see the headlines, and hear the pundits. Almost all of the talking heads you see on TV are the same people who talked us into this mess, didn't see it coming, and continue to spout pacifying yet grossly unsound economic ideas based on faulty theory. Now they want us to think that everything is getting better, as if we can have an economic recovery by having the government print lots of money to give to the super-rich, and still have massive unemployment. They want each us to think that we are alone in our suffering, and that the rest of the country is doing just fine. “Trust your government.” “Go back to sleep.”
Current unemployment figures (as seen on TV) are hovering around 10 percent these days. Every time things get bad economically and they want you to feel better about your situation so that you'll borrow and spend more money, they come up with a new way to calculate ridiculously optimistic figures. The real inclusive unemployment level right now is a lot closer to 20 percent. That's one in five Americans who could be working more than they are at present. When unemployment is that high, we are all affected. If you're hurting, angry, or frustrated, YOU ARE NOT ALONE!
Since economist John Maynard Keynes famously used the argument, “In the long run, we are all dead,” to justify government intervention in the economy, we have been fed a steady stream of economic propaganda to justify a litany of government schemes to steal from the poor to give to the rich. In 2008, it was “bailouts” of institutions that were “too big to fail.” In reality, they were too big to continue as the burdens on the economy that they have become. In 2009, it's “stimulus” to ensure the flow of credit, “the lifeblood of the economy.” Of course the people benefitting from this system of credit want you to believe this, but economist Peter Schiff (who predicted the crisis) was much more accurate when he said, “credit isn't the lifeblood of the economy, it's the cancer!”
The most dangerous people to the established order of government exploitation are those who think for themselves. I've noticed that every day, more Americans are starting to do just that. The worse things get, the more people start questioning what they're being told. And therein lies the opportunity! A questioning mind is an open mind, and all over my district, people are asking questions. It has been a great opportunity to present alternative economic principles about free markets and sound money, that keep people thinking and involved in the political process. Fortunately for America, this healthy reaction to a government that is out of control has become a national phenomenon.
-Adam Kokesh
"equity holders have the right to decide which assets the CDO sells"
"the last thing needed is investors figuring out how to abuse comparable loopholes not only in the existing securitization universe but also for any such planned offerings in the future."
Get with it Tyler. As long as you make your nut, what's a little more abuse among friends, right? I mean seriously, what's the problem? If I don't take this ripe little senorita, someone else will.
Get on the right side of this trade and stop all your muck raking bullshit. Gez, I thought you were one of da boyz?
This doesn't sound like a loophole at all, really. It sounds like the "senior" holders signed away to the junior holders (equity portion) their rights to control the collateral to the junior holders?
That's called being a sucker!
It will get very interesting if there is a demographic difference between the typical holders of the various tranches though (US "equity" holders vs. Chinese in other tranches... hedge funds in high risk tranches vs. pension funds in "safe" tranches). If that sort of schism is broad-based, look for legislation to protect some innocent victims of their own stupidity.
Why isn't it a fraudulent conveyance for the equity holders to dispose of assets at bargain prices and prevent the trust from paying its obligations to senior tranches?
Is the argument that the senior tranches are preferred equity, and that preferred equity has no standing to sue for fraudulent conveyance?
That is beautiful.
Thanks for the insightful on-topic post.
Interesting.
As long as it is not illegal, why complain? If you can not beat 'em, join 'em!
Gonna need more details please..I dare not imagine this situation is directly / fully portable to ABS or MBS-related CDO. I speak from my own arse if I'm wrong.
If senior note holders indeed purchased the TRUP-backed CDO classes while unaware of who has the controlling interest...for shame. Checking the residual interest right's should be a priority for any fact-finding analyst. Any super-senior CDO holders, in particular, should know better.
'these PretZels are making me thirsty'...it's a pun if anyone knows it.
Seniors are weak. That's why they took the least risky path in the first place.
They haven't anyone trying to figure stuff like this out, they wait and react. They never offered to share the pain with the equity holders.
An outside predator saw weakness and moved.
TPG may pull this off once but other firms will copy and other seniors will begin to seek mutually beneficial arrangements and at some point a real clearing price will develop for these assets.
God save the predators.
There is nothing wrong here. Basically the equity holders, if they have the right to sell, should sell to the highest bidders. .05 on the dollar sounds low. They should go out for bids. In a way, this action would force price discovery. It's a way the market is using to "mark to market". However, I can't believe the senior tranche holders were this stupid. Well, maybe I can.
The equity may be able to decide what is sold but the proceeds should still pay debt. I suppose the equity will say the payments are fees for serices, not the purchase price of the property, but that is easy to see through.
Also, under applicable state law, when an entity is insolvent those controling the entity may have fiduciary duties to the entity's creditors.
The proceeds will go to pay down the debt.
However, the equity is/was essentially worth $0 (in terms of future cashflow); but, we see now the right to choose what assets to sell and for how much is worth something. So, though the equity has $0 cashflow value it has positive "legal" value, meaning that someone who wants to raid the CDO will pay a premium above the cashflow value to get the right to raid the collateral assets (thus grabbing value from the senior note holders). So, the equity holders gain from this strategy, going from $0 to $[Legal Value].
So, by buying equity for cents on the dollar a 3rd party can get its pick of the collateral at bargain prices, compensating it for the payment to the equity. I would think if this proves a valid strategy in the courts then the equity would settle around a price relative to how cheap the collateral assets could be bought below their expected cashflow value (ie 3rd party can take advantage of the very high liquidity premiums on the collateral assets and capture this value away from senior note holders).
If a liquid market existed in the collateral assets this strategy wouldn't necessarily work that well, as I assume the 3rd party couldn't get below market value on the collateral assets. The CDO probably has to sell for the highest offer price.