Intelsat

Thanks to Going Private for writing about this interesting deal.

Intelsat key stats:
Initial equity investment = $128M
Investment period = 37 months
Current (last sale) equity value = $1.2B
Estimated IRR = 106.65% pa (go on, lick that IRR, you know you want to)

Current EV = $16.5B
Total Debt = $15.4B ($10.4B of existing debt to roll over + $5B bridge loan, arranged by Credit Suisse, Morgan Stanley and Bank of America)
Total Leverage = ~9.8x EBITDA (after annualising YTD published Sep 07 results)

Even if we assume that this is a high-margin, high-growth, limited competition business (which a cursory glance at the company information and financials seem to indicate, but I must dig further), 9.8x is a very high leverage multiple. Quite rightly, a few comments point out that this leverage would never have happened had the lead banks worked on the assumption that they would have to hold a significant chunk of the debt on their books (and all its related risks). The bridge loan will be problematic - it is basically a bet by the lead banks that by the time it matures, things will be considerably closer to normal and that it can be refinanced in the debt market.

Also it seems that this is a HoldCo lend (i.e. the debt is borrowed by the holding company that owns the actual operating companies), which raises an extra level of risk. HoldCos rely on dividend streams from the OpCos to pay the expenses and repay debt. Often, OpCos have their own debt to service (which appears to be the case with Intelsat), and there are (or should be) severe restrictions on the dividends it can pay to HoldCo. Should things go slightly askew at OpCo level, the dividend stream might get dammed up by the banks lending to the OpCos - which means less cash to HoldCo, putting HoldCo principal and interest repayments at risk.

The interesting part is that BC Partners (the new owners) and the banks chose to roll over the existing loans rather than have the existing loans refinanced by new debt as part of the transaction (which is how these are typically done). The reason? The current leveraged loans market is not conducive to issuing new debt. So instead of having to sell a fresh new $15B batch of debt to a group of banks suffering indigestion, why not just let the existing bankers (who presumably still like their debtor) stick around? Sure, this means lower fees for the lead arrangers, but given the option to forgo some fees to significantly reduce your headache and the hit to your capital provisions, it's worth it.


Other tidbits
- Our new graduate started last Monday. The second thing I did (after I said hello) was rescue him from the fiery exchange between our Executive Assistant and some back office guy in Bangalore. The next day he brought his iPod with noise-cancelling earphones.
- Overheard:
[Person 1 gets flicked in a certain protruding area of the thorax region]
Person 1: "I don't know if I should feel good or bad about that."
Person 2: "It's because you feel guilty about how good it feels."
- Interesting analysis of the BHP Billiton-Rio Tinto deal from Deal Professor.

Soc-ked In

Wow. Societe Generale just lost 4.9B euro in what looks like a fraudulent job by a junior trader. In today's hyper-automated trading desks, VaR, and layers upon layers of compliance measures, I thought maybe you could get away with a couple of hundred million, at most, before you (a) get caught, (b) reach a safe haven island, or (c) kill yourself.

Crap job by SocGen. All those millions of euros spent on risk management and compliance, and you couldn't stop a noob trader trading some vanilla futures. You might as well just have given him a nice big vault full of cash, you would have lost less money.

And while it is very very wrong and illegal and should not be done by anyone under any circumstances, kudos to the junior trader. (Hey, it's Biblical so it's OK.) You give hope to many subpar traders the world over that if they dream it, it will happen. May you receive a lucrative book/movie deal out of this. Might be the next Liar's Poker. Or not.

Where's an open window when you need one?

So today, all eyes were on the bloodbath in the market, with the S&P ASX 200 shedding 7% today, officially entering "bear market" territory (thank you, Mr/Ms Hedge Fund Manager) and essentially wiping out all the gains of the past 12 months.

Neeeeeeaaat. And to have it happen during my lifetime... what a story to tell the kids. I look forward to the day when people will be writing about the current crop of wheelers and dealers, and how it was such an extravagant lifestyle fueled by debt and ego, etc etc. The 80's baby... when it comes back, it comes roaring back!

Sure, he started it, but he didn't love the 80s like I do.

Now my 99% cash allocation doesn't look so stupid anymore, and who knows, I might even go on a bit of a bargain hunt.

I like this article, dedicated to a mostly illiterate audience, just in case they've been holidaying in the Pacific for six months using the money found after they mortgaged their house and retirement savings. I especially like this section: "What is the sub-prime market?" It's you and your kind, you bogan (and valued reader).

UPDATE: The Fed has made an emergency cut of 75 bp to its target rate. George Bush also announces new expansionary policy to stimulate the economy, to be funded by a (larger-than-ever) budget deficit, and proceeds from sales of a half-share in the USA to a consortium led by the Carlyle Group and Saudi sovereign funds.

Adios 2007, and haroo 2008

Well after the flurry of blogging leading up to the final month of the year, Rockett Fuel falters, tripped up by the many Christmas functions to attend. And a deal or three in between. So a belated Merry Christmas, Happy New Year, and so on.

Now my normal blogus modus operandi is to get one of those question lists you get from your spamming friends, and answer them here. Unfortunately I am yet to receive such spam (perhaps because I have alienated many friends in the past 12 months), so this is a placeholder entry until I find such a list.

In other news:

Oil touches USD 100/barrel.
Latest megarich toy: a brand-name US or European bank.
Rockett Fuel: go-to guy for jumpstarting failed syndications. (Well, can't link to them, obviously. Who wants to announce failed syndications?)

Wii Points Index

I recently got a Wii. How I am going to find time to play it is irrelevant, I just wanted one.

Those who have one, or may have been following its progress, would probably know that Nintendo has a Wii Points system to allow players to purchase retro games from its online channels. The games are priced by Wii Points, with the more popular/more recent games obviously charging higher prices.

That, and my great admiration for The Economist's Big Mac Index, gave me a thought: how much do these Wii Points cost in different countries? Clearly every Wii Point is exactly the same, and should theoretically be worth exactly the same. In practice, regional restrictions mean there are no arbitrage opportunities. In any case, I started with what I could find off the net, as follows:

Cost of 2000 Wii Points
Country	Local Currency	Store	Price (in local currency)	Implied FX Rate to USD
US	USD	Toys R Us	21.9900	1.0000
UK	GBP	Woolworths	13.9900	1.5718
AUS	AUD	EB	35.0000	0.6283
CAN	CAD	Sears Canada	24.9900	0.8800
JAP	JPY	Indicative	2,000.0000	0.0110
Country	Local Currency	Current FX Rate (USD equiv) www.xe.com	Implied Price based on Current FX Rate	Over/(under) pricing relative to current FX rate
US	USD	1.0000	21.9900	N/A
UK	GBP	2.0609	10.6701	31.11%
AUS	AUD	0.8770	25.0741	39.59%
CAN	CAD	0.9895	22.2233	12.45%
JAP	JPY	0.0092	2,390.2174	(16.33%)

So the lesson isn't so much about international economics and arbitrage; it's simply that UK and AUS gamers are clearly being ripped off by local retailers, who aren't passing on the benefits of a weaker USD. Time to campaign, geeks. Japanese players, as usual, are treated to an entirely different echelon of gaming goodness. I would move there just to be hooked into Nintendo nirvana.

Highly doubt this will replace the Big Mac Index; for one, it does not account for the "basket of goods". Still, makes you realise why game console makers continue to maintain region coding even though there are clear benefits to gamers to remove them (i.e. being able to import hot games from overseas, rather than relying on the pitiful supply from local distributors).

Bring Green Pencil To Voting Booth!

Can't decide the lesser of several evils in this election?

Vote Laberalocrats First - with a green pencil! The ultimate fence-sitting vote, and it's QUINTUPLE VALUE voting!! (Take that, cheap Greenies with your double value voting.)

How To Lose $3 Billion in 21 Days

Well, banker karma got to me. After the last post which arose from superchronopossession, three deals dropped on my desk at the same time, and closing pretty much one after the other (which was last Friday). Hence the extended absence of tales of Rockett Fuel office shenanigans.

Since the last post, Messrs E Stanley O'Neal and Charles O Prince III (no, the OTHER Charles) will, sadly, be leaving the great ships Merrill Lynch and Citi. In a loving tribute, both were handsomely rewarded as a result of the deft management. If you think it is easy to lose tens of billions of dollars, think about this: you have 24 hours to spend $5 million, and not a cent less, and you can't keep a cent or keep anything you buy with it or make any money out of it. Yes... not so easy to think of how to make $5 million disappear into thin air. It takes a special kind of leader to do the almost-impossible.

But my oh my, aren't we all blessed in our lifetimes to see two high-profile leaders achieve exactly this. That is why, ladies and gentlemen, they will be walking away with roughly $200 million, give or take a lazy few tens of millions. It takes talent, it takes bravado, and unrivalled knack for timing the market (i.e. jumping into high-risk debt and structured products at the exact time they were turning unsustainable). You and your silly quant models could not have timed it any better. Unless you are Bear Stearns.

Why I now dislike redneck unemployed lying useless lazy criminal borrowers even more than I did before (subprime crisis impact - it's PERSONAL)
Keeping it brief due to propensity to cry when thinking about it:
- not happy* with bonus
- not happy* with pay rise
- pay rise actually lower than that offered by competing bank earlier in the year, when I was as green as Link's costume
- making me think... can one actually do a valuation on loyalty, and therefore, did I overvalue it?

* NOTE: gross understatement of the night.
** The irony of my situation, in light of the above take on Wall St maths, is not lost on me. Please do not rub it in by pointing it out.