Blackstone swings to loss as deal funding and fees dry up

Mar.10, 2008 in Market Outlook

Blackstone swings to quarterly loss

Equity firm feels effects of credit crunch, reaffirms dividend through ‘09

By John Spence, MarketWatch

Last Update: 2:33 PM ET Mar 10, 2008

BOSTON (MarketWatch) — Private-equity giant Blackstone Group reported a
quarterly Monday, saying a “meltdown” in the credit markets has dried up global
funding for the leveraged buyouts that are at the heart of its business.

Blackstone (BX) said it swung to a loss of $170 million in its fourth quarter vs.
net income of $1.18 billion in the year-earlier period. Revenue slipped 73% to
$345 million.

Total expenses jumped to $1.06 billion from $182.9 million. Blackstone said its
initial public offering and reorganization affected the year-over-year
comparisons.

Adjusted net income after taxes dropped to $88 million, or 8 cents a share, from
$808.1 million, or 72 cents a share, in the previous year’s period. Adjusted net
income includes unrealized gains and related compensation but excludes non-cash
charges, the company said. Wall Street had expected earnings of 22 cents a share,
according to the average estimate calculated by FactSet Research.

Blackstone, based in New York, has also been hit by the anxiety that has been
swirling around bond insurers such as MBIA Inc. (MBI), Ambac Financial (ABK) and
FGIC Corp., in which it owns an equity stake.

Shares of Blackstone, which took a write-down on FGIC, are off more than 50%
since the IPO.

Skittish lenders

As a result of the credit-market turmoil in the second half of 2007, debt
underwriting fell, while the backlog of pending private-equity-led deals piled up
to record levels, Blackstone said in a written statement issued before Monday’s
opening bell.

The deal backlog, “coupled with other poor-performing fixed-income securities and
rising credit losses, has materially hindered lenders’ willingness to fund new,
large-sized acquisitions,” said Blackstone, which also has a sizable real estate
portfolio.

“As a consequence of reduced borrowing ability, the volume of new private-equity
acquisitions has materially declined,” the company said. “Recently announced
private-equity-led acquisitions have mostly been smaller in size, with less
leverage and less favorable terms for the debt provided.”

Blackstone shares were down 0.4% in afternoon trading.

The fourth-quarter results “reflect the difficult operating environment that
could result in little if any incentive income in private equity throughout the
remainder of 2008,” analysts at Deutsche Bank wrote in a note to clients.

“That said, management fees should provide a bit of relief as fee-generating
assets under management continued to grow,” they added.

“Importantly, base management-fee growth was stronger than expected, although
transaction fees from the Hilton deal also helped bolster cash EPS more than we
expected,” said Banc of America Securities.

“Asset growth and hence capital raise continues to look solid and management
re-affirmed its ability to pay its $1.20 annual dividend through 2009,” BofA
analysts wrote in a research note.

Blackstone’s chief executive, Stephen Schwarzman, said a dearth of available
financing for big leveraged deals has eaten into fees.

“Difficult market conditions in the U.S. and Europe continue in 2008, and there
is little visibility on when these conditions might improve,” the CEO said.

“However, despite the meltdown in the credit markets, we have made eight new
private-equity commitments since the credit crunch, representing $2.7 billion of
equity, and we expect to continue to see new investment opportunities,
particularly in Asia,” he said.

Blackstone reiterated its intention to pay annual dividends of $1.20 a share on
its common stock through 2009.

‘Severe financial crisis’

Schwarzman during Monday’s analyst call said the company was expecting credit
woes to worsen. “On this front we were unfortunately proven correct,” the
Blackstone CEO said.

“Clearly, we are in the midst of a severe financial crisis that has rolled from
subprime loans to CDOs [to] panic selling of even investment-grade assets,”
Schwarzman said.

Yet he said turbulent times when investors give up as assets reprice lower can
produce the best opportunities for private-equity firms.

“How long will it last? I am not certain, no one knows the answer,” the CEO said.

“Generally this kind of severe unwinding and panic, anxiety and heightened
overreaction doesn’t tend to last very long,” Schwarzman predicted. “It then
takes time [for] credit to be restored and we see that the Fed is working
particularly hard at that.”

When asked about financing conditions in real estate, the markets for larger
transactions are “pretty much dead at the moment,” he said. “You know, the system
is locked up.”

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