Spinning Deutsche’s Loan Sale

I’m having something of a Rashomon moment with respect to Deutsche Bank’s sale of leveraged loans.

Dana Cimilluca and Peter Lattman, in the WSJ, say that the mooted sale by Deutsche Bank "could bolster its own health as well as that of the global banking system". Their numbers: "prices just below 90 cents on the dollar," a total deal of "between $15 billion and $20 billion" although it could be closer to $8 billion, and even some profit opportunity:

Deutsche Bank also could earn some hefty income along the way, as it is offering to finance the buyout firms’ purchases with about three-times leverage — or $3 of debt for every of $1 of equity — and charging a healthy interest rate.

But then check out Vipal Monga in The Deal, who’s much more downbeat. He’s looking for "an average price of around 85% of par," and says that the deal size is likely to be "a shade less than $5 billion". And as for the financing, it’s much better for the buyers than for the seller:

The leverage is being offered at a rate under LIBOR plus 100 basis points, which allows the buyers to reasonably aim for an internal rate of return of more than 25%. The financing will have a term of seven years and offers margin holidays to the buyers, meaning they won’t have to face margin calls for some initial period if the debt’s market price falls.

There’s no cut-and-dried way of telling who’s closer to the truth on this one, but Monga seems to have more detail and more color. But one can at least look at the terms being offered to the private equity shops and ask whether a double-digit spread over Libor really constitutes "a healthy interest rate" from Deutsche’s point of view. My feeling is that it doesn’t, not when Deutsche is selling the leveraged loans at distressed levels.

Let’s use the WSJ’s numbers: if the deal is $15 billion at say 89 cents on the dollar, that would mean write-downs of $1.65 billion. A spread of 100bp on three quarters of $15 billion, meanwhile, means income of about $112 million a year – or 6.8% of the putative write-down. Which doesn’t seem particularly healthy to me.

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