Lone Star picks up $30.6bn of CDOs at sharp discount

Fresh off the close of its $7.5bn sixth buyout fund, the distressed-focused private equity firm will buy the CDOs from Merrill Lynch for $6.7bn. The investment bank will finance 75 percent of the purchase price.

Lone Star Funds has agreed to purchase $30.6 billion (€19.6 billion) of collateralised debt obligations comprised of asset-backed securities from beleaguered investment bank Merrill Lynch for $6.7 million, 75 percent of which will be financed by Merrill Lynch.

A Lone Star spokesman did not respond to requests for comment by press time.

As of 30 June, the CDOs were valued at $11.1 billion, approximately one third of their face value. As a result of the CDO sale, Merrill Lynch expects to record a pretax write-down in the third quarter of 2008 of approximately $4.4 billion.

The transaction is expected to close within 60 days.

“The sale of the substantial majority of our CDO positions represents a significant milestone in our risk reduction efforts,” said Merrill Lynch chief executive John Thain in a statement. The firm’s risk-weighted assets will be reduced by approximately $29 billion.

Lone Star recently closed its sixth buyout fund on approximately $7.5 billion. The fund focuses on “distressed debt and in asset rich or financially oriented operating companies”, according to January 2008 investment committee minutes from the Oregon Investment Council.

The Texas-based firm’s buyout fund is run side-by-side its $2.5 billion debut real estate fund, making global “opportunistic” investments in distressed debt, distressed real estate and real estate entities, according to the minutes.

Lone Star has been actively picking up distressed mortgage-related assets in the past 10 months, most recently paying $5.9 billion for commercial lender CIT Group’s subprime mortgage unit.

The Texas-headquartered firm’s fifth buyout fund, which was technically organised as two funds, one registered in the US and the other registered in Bermuda, closed on $5 billion in September 2004.
Merrill Lynch also plans to issue $8.5 billion in new common shares through a public offering. Temasek Holdings, one of the two sovereign funds in Singapore, will purchase $3.4 billion of the stock.

Merrill Lynch has sold stakes worth a total of $11 billion date to sovereign wealth funds the Kuwait Investment Authority, the Korean Investment Corp and Temasek which is the firm’s largest shareholder.