CLO Technique to Fund Private Equity Deals

Private equity firm Kidd & Co. has devised a novel securitization strategy that would finance investments in distressed-company debt.

As part of the plan, Kidd's investment-banking affiliate, Glenville Partners, is putting together a team of professionals to help execute the deals. Leading the group is managing partner Sean Byrne, who arrived last month from J.P. Morgan.

He has already hired sales specialists James Powers and Zoltan Adam, and intends to bring another 6-10 staffers on board in the coming weeks. The crew has two issues in the works so far, and anticipates a steady flow going forward.

Kidd expects the initial deals to hit the market in 3-6 months. One, backed by loans to a finance company, would total $50 million to $100 million. The other, involving a medical-equipment leasing business, would be in the neighborhood of $30 million to $50 million. Both would be privately placed with a small group of investors, and whether they'll carry any ratings will depend on the demands of prospective buyers

The securitization initiative dovetails with Kidd's typical strategy of taking control of troubled companies by buying their debt, including nonperforming obligations, often for just cents on the dollar. The firm, which has 35 years of workout and turnaround experience, then aims to get the businesses back on track via operational improvements. The goal is to exit the positions in 3-5 years.

The planned bond offerings would add a twist, with Kidd aiming to get its acquirees' loans performing again through its operational intervention and re-structuring of payment terms. After a short delay to establish a payment history, Glenville would then package some of the re-performing debt into what essentially would be collateralized loan obligations.

In some cases, Kidd might finance the initial investments through warehouse facilities. Ultimately, the intent of its securitizations would be to give the Greenwich, Conn., firm a means of partially cashing out of the underlying companies while rolling the proceeds into new acquisitions.

The effort coincides with a steep downturn in the buying power of many private equity shops, as backers of their funds run out of cash amid the global financial crisis and leverage proves increasingly scarce. However, there's no word on whether those factors were a consideration for Kidd. The strategy is "a means to finance certain private equity deals as well as raise capital," one source said.

Given the hits the structured-finance market has also taken over the past two years, investors might prove skeptical of such unusual offerings. For that reason, Byrne's staffing efforts are focused on professionals with extensive investor contacts and solid structuring experience.

One buysider said it would be easy to assign values to the bonds, adding that their single-obligor nature would actually make them more attractive than some diversified pools. That's because investors would have a clear line of sight into the underlying portfolios. It also helps that Kidd would still have a stake in performance of the companies.

Looking forward, it's likely that future securitizations from Kidd would be larger and end up in front of greater audiences. Some might also involve debt of multiple companies, in a more typical CLO format.

As for Glenville's staff, Byrne landed at J.P. Morgan by way of the bank's takeover of Bear Stearns, where he traded and structured credit derivatives. He has also held structured-product positions at RBS unit NCB, Salomon Brothers and Nomura.

Powers most recently worked at S&P, and before that was at Credit Suisse. Adam last worked at BB&T. He has also spent time at GMAC.

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