Bernanke Is Bringing Back Irrational Exuberance

On January 25th we got word from the Fed that ZIRP would be extended until at least 2014. Bernanke’s guarantee of another two years of cheap-cheap money has lifted the market’s animal spirits. Since the Fed announcement (33 trading days), the S&P got a 7% lift. But that’s not the measure of Ben’s success. I’m seeing it in deal flow:

*There have been 29 IPO’s that raised $3.3B

*Another 35 deals got inked for secondary issuance of common, preferred and/or convertible stock totaling $3.7B

*The visible calendar for both IPOs and secondaries is big. $4.3B is registered for sale; another boatload of paper wants to get sold on top of that.

*The High Yield market blew out $70B of paper.

*Leveraged loan activity has totaled $75B.

I want to focus on six deals (of the 22 that got completed) from last week that I find troubling. These are referred to as Dividend Deals. The borrower takes on new debt in order to pay a stock dividend to common shareholders. (I prefer to see dividends paid from cash flow from operations, not new debt.)

#1 Borrower:  SeaWorld Parks & Entertainment Amount:  $500 million Bank syndicate:  Bank of America Merrill Lynch, Barclays Capital,  Deutsche Bank, Goldman Sachs, J.P. Morgan, and Macquarie Use of Proceeds:  To fund a $500 million dividend to Blackstone Group. 

#2 Borrower:  Armstrong World Industries Amount:  $250 million Bank syndicate:  Bank of America Merrill Lynch, J.P. Morgan, and Barclays Capital Use of Proceeds:  To fund common share dividend.

#3 Borrower:  Getty Images Amount:  $275 Million Lead Manager:  Bank of America Merrill Lynch Use of Proceeds:  To fund a common share dividend.

#4 Borrower:   Telesat Canada Amount:  $2.55 Billion Bank syndicate:  J.P. Morgan, Credit Suisse, Morgan Stanley, and UBS Use of Proceeds:  $705 million will fund a dividend to common  shareholders including: Loral Space, Canadian Pension Board  and option holders of common shares. 

#5 Borrower:   4L Holdings Amount:  $300 million Lead Bank:  J.P. Morgan Use of Proceeds:  Refinance of existing debt and to pay common share dividend. 

#6 Borrower:  Grede Holdings Amount:  $250 million Syndicate:  GE Capital, Jefferies Use of Proceeds:  To fund a $216 million dividend and general purposes. 

Grede Holdings was bought by Wayzata Investment Partners LLC in February of 2011. GE capital provided a portion of the financing. The 2012 Grede deal arranged by GE will result in GE receiving dividend income. This is lining up at the trough for these financial players.

On balance, I think that Bernanke is delighted with these results. He wants the Fed’s cheap money to fund this type of financial activity. When debt is used to pay dividends, it creates equity from debt. When the likes of GE and Wayzata have more (paper) equity, they can borrow more, and do more deals. Ben loves it when financial players do deals. He believes that creating financial wealth for GE ends up creating jobs. But there is also a cost:


Another credit bubble is forming. Credit quality is deteriorating, while financial engineering is back in vogue. The Fed keeps making the same mistake of fueling these bubbles. It is celebrating this process as a “success” while at the same time it is sowing the seeds for another bust. Does the Fed really think American’s are better off if Blackstone receives another $500 million dividend?

The problem is, that is exactly what it believes.

pig trough

Photo: northdevonfarmer on flickr

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