Carl Icahn shows why he’s Carl Icahn

Bails out Realogy, for a steep price.

It looks like the fixer-upper that billionaire investor Leon Black bought in real estate company Realogy won’t be foreclosed on just yet.

The company behind such big names as Century 21, Coldwell Banker and Corcoran Group, came this close to defaulting on its senior debt, but thanks to a deal struck with billionaire Carl Icahn, Realogy was able to pay down its senior loans and give itself some breathing room.

Realogy this week said it raised $515 million in new loans, with Icahn representing 30 percent of that money. It plans to use $365 million of the proceeds to reduce senior debt.

The company’s senior debt had required that Realogy’s debt load be no more than five times its cash flow, but as of the end of June, the company was slightly above that threshold. What’s more, a weak housing market has cut into cash flow, making the need to pare down the senior portion all the more urgent.

Black’s Apollo Management bought Realogy in a highly leveraged, $7.7 billion buyout in April 2007, but the weak credit markets and the mortgage crisis have helped the company to stay afloat.

Icahn earlier this year bought $311 million in Realogy loans at roughly 40 cents on the dollar, and under the deal announced this week Icahn is selling $91 million of that back to Apollo at about double what he paid, according to a source familiar with the matter.

On top of that, Icahn is swapping $220 million of the junior debt he holds for $150 million of newly issued notes that are more secure and pay a higher interest rate.

Long-term, Realogy still faces problems. The debt-to-cash-flow ratio is tested every quarter, and starting in April 2011, the ratio falls from 5 to 4.75.

What’s more, Realogy has only cut its overall debt by $70 million, leaving it on the hook for $6.3 billion that now commands a higher interest rate.

Apollo and Icahn declined to comment. Realogy declined to comment beyond clarifying what was in publicly released financial statements.

From what I read elsewhere, the “senior debt” Realogy paid back was debt Icahn had bought for 0.40 on the dollar and repaid himself yesterday at 0.80. Nice work if you can get it.

Realogy using government accountants

It’s borrowing more money at higher interest to pay back pushy creditors who are owed less money. But this all makes for a stronger, healthier company, just as the FDIC is growing stronger every day. Trust us.

$150 million more for Realogy – will it be enough?

The Wall Street Journal reports that Apollo Management, owner of Realogy (and thus Sotheby’s, Century 21 and Coldwell Banker) is throwing another $150 million its way to keep it alive through 2009.

But it isn’t going to be easy. Realogy is parent to Coldwell Banker, Century 21, Sotheby’s International Realty, Corcoran Group and other major brands. Its 16,000 affiliated offices doing business in 92 countries and 50 states all depend on the strength of the housing market — which few project will turn around anytime soon.

Out-of-Balance Sheet

Also, Realogy’s balance sheet is precarious. Last year, Realogy’s revenue tumbled by $1.14 billion to $4.72 billion. The company had only $109 million of cash left over after paying $627 million in debt. The company also has $113 million available on its $750 million revolving loan as well as the $150 million promise from Apollo. But it isn’t clear that this stockpile will be sufficient if revenue continues to plummet.

While bondholders were reassured by Apollo’s $150 million infusion, Realogy bonds continue to trade at extremely distressed levels — as little as 11.5 cents on the dollar, according to MarketAxess, reflecting investors’ concern the company may file for bankruptcy soon.

“Their profitability has eroded significantly both because of steady price declines and volume declines in the last couple over years,” says Moody’s analyst Lenny Ajzenman. He downgraded the company’s debt to just three notches above default in December; few companies with a viable capital structure have lower ratings.

Apollo’s decision to put up $150 million into the struggling venture raised eyebrows in the private-equity world, where fund investors are resistant to throwing good money after bad.

Apollo recently succeeded in raising nearly $15 billion for its latest fund. But the $9 billion fund that owns the Realogy stake has spent most of its money, according to the fund summary. An Apollo spokesman declined to comment. In a statement, Marc Becker, a partner in the firm, acknowledged the “challenging task” facing Realogy’s management and the “extremely difficult time in housing.”

Nationally, the market is grim. Home resales fell to a 12-year low in January according to the National Association of Realtors, alongside a 14.8% slide in median home price.

To be sure, some regions of the country are seeing a surge in home sales, particularly suburban areas in which lenders are dumping large volumes of foreclosed homes at highly discounted prices.

Urban Blight

But many of Realogy’s operations are in urban regions, where there is more of a standoff between buyers and sellers, reducing sales activity to a trickle. The firm’s brokerages and its franchises have offices in all 50 states, but Coldwell Banker — one of the company’s largest revenue generators — is concentrated in urban areas.

Corcoran Group, which handled $18 billion in home sales in 2007, operates in the once-robust New York City, Hamptons and Palm Beach, Fla., markets. In New York, transaction activity was down roughly 50% in February, compared to the same month in 2008, according to Brown Harris Stevens’s President Hall Willkie.

Another danger is high-producing brokers jumping ship. Since January, at least three high-earning Corcoran and Sotheby’s brokers have gone to a rival firm, according to local agents. Corcoran says such churn is normal and several agents recently joined the firm. To assure brokers that the company is solid, Mr. Becker, fellow Apollo executive Ali Rashid and Realogy’s Mr. Smith, organized a town meeting in February with Corcoran and Sotheby’s management, held in the headquarters of Sotheby’s auction house.

In an effort to shore up Realogy’s balance sheet last year, Apollo attempted a debt swap — essentially a gambit that asks bondholders to trade in their existing securities for new notes, often with worse terms.

But that strategy was stymied by Carl Icahn, who has battled or befriended Mr. Black on numerous deals. Mr. Icahn’s High River investment firm owns a portion of Apollo’s notes, which stood to lose their place in line if the offering went through, and successfully sued to block the exchange in December. In the suit, Mr. Icahn charged that Realogy was “deeply insolvent” and default virtually “inevitable.”

Moody’s “Most Likely to Fail” List

From Zero Hedge. Realogy’s on there, but so are 282 other companies.

Good news for Realogy?

Apollo Management, owner of Realogy and thus Century 21 and Sotheby’s, has hired Henry Silverman as CEO. This is the financial wizard who did very, very well until, in 1997, he bought CUC and was almost brought down by that company’s corruption. He’s back now, and will apparently try to help Apollo out of its own mess. Ironically enough, when CUC brought him down and he was selling off parts of Cendant, he unloaded Realogy on Apollo:

In 2007, Mr. Silverman sold Realogy, a residential real-estate broker spun off from Cendant, for $6.65 billion to Apollo. When the housing market tumbled, Realogy turned into one of Apollo’s most troubled investments. Realogy is the parent to Coldwell Banker, Century 21 and Sotheby’s International Realty.

So what’s he planning to do with those companyies now?

An Apollo spokeswoman declined to comment.

 

 

Will he sell it again or fix Apollo and permit them to hang on to it? We’ll see.

Realogy: “I will survive!” (2009, anyway)

Realogy disputes the idea that it’ll go bankrupt, this year. Good for them – right now, polyester blazers are a drag on the market.

Realogy stumbles

The news gets no better for Realogy, parent company of Century 21, Sotheby’s, Coldwell Banker and Corcoran. From “The Real Deal” :

Corcoran is owned by NRT — the nation’s largest residential real estate firm, with brands such as Century 21, ERA, Coldwell Banker and Sotheby’s International Realty under its umbrella. NRT, in turn, is a subsidiary of the Parsippany, N.J.-based Realogy Corporation, a real estate and relocation firm which was taken private last year by Apollo Management in a $9 billion leveraged buyout, and which has faltered amid the nationwide housing crisis.
>>>>>>
Meanwhile, Apollo’s troubles have been widely publicized, as the companies it purchased during an aggressive buying spree at the height of the market struggle under the weight of debt. One of its acquisitions, Linens ‘n Things, is now in Chapter 11, and guessing which of Apollo’s companies will be next to fail has become something of a parlor game.

Realogy, which was recently downgraded by Standard & Poor’s to a CC/Negative rating, one notch above default, and placed on a list of the Global Bond Market’s “Weakest Links,” is said to be a likely candidate.

How does Realogy’s plight impact Corcoran? That’s a question the real estate community in New York has been abuzz about, as the mammoth company has closed offices, eliminated staff positions, cut its advertising and marketing budgets, upped the fees paid by brokers and canceled the firm’s annual Christmas party. Insiders say Corcoran faces pressure to cut costs and increase profits to help meet debt-service obligations and buoy NRT’s flagging subsidiaries.

“[Corcoran] does all sorts of things to create money to help the parent company to pay debt,” said a Prudential Douglas Elliman executive who asked not to be named. “It’s hard for them to compete when we don’t have debt.” Like many sources interviewed for this article, the Elliman executive declined to go on the record for fear of damaging professional relationships.

The parent company that once had pockets so deep founder Barbara Corcoran claimed it felt “like having Daddy Warbucks come in” now appears to be a liability.

“It’s unfortunate for [Corcoran] that they’re part of that company,” said a former top Corcoran executive who asked to remain anonymous. “They have a huge company with no money backing them. That’s bad.”

Parental woes

One of the biggest question marks is what will happen to Corcoran and its sister companies if Realogy fails.

The outcome is nearly impossible to predict, since it rests largely in the hands of Apollo and its lenders — and if Realogy goes into bankruptcy, possibly the courts.
>>>>>
[E]xperts seem to think that the Corcoran Group isn’t going anywhere. They say that if it came down to it, the likely outcome of a Realogy collapse would be that Corcoran would be sold and would continue operating.

“I can’t imagine for a moment that the company could go out of business,” said Barbara Corcoran. “Their sales staff is too powerful.”

Paul Purcell, a former president of Elliman and now co-founder of the real estate consultancy Braddock + Purcell, said, “They’d absolutely look for a buyer before they’d liquidate it. In the worst-case scenario, someone would want that brand.”

If Apollo allows Realogy to go into bankruptcy, as it did with Linens ‘n Things, Realogy would likely be restructured, which may include some of its companies being sold, rather than liquidated, said Donald Wong, the director of corporate ratings at Standard & Poor’s.

Since much of Realogy’s value is intangible, in market share and brand names, “if you were to liquidate this company, you wouldn’t get a lot back.”

Realogy Death Watch, cont.

Realogy, corporate owner of Century 21, Sotheby’s and Coldwell Banker, is shutting down its Coldwell Banker Litchfield office and shedding 15 agents. The closing came as a surprise to the agency because they’d been doing well “but not well enough, obviously”, according to its manager. As I warned last year, when Apollo Management, owner of Realogy, saddled its subsidiary with junk debt and onerous interest payments, the strain of making those payments would jeopardize even strong real estate offices. I guess it has.

Hmm – anyone we know in real estate who has to come up with cash?

Corporate debt has become rare and expensive and for those with bad credit, impossible to find. Why risk money with corporations when the federal government’s guaranteeing what would otherwise be junk?

So, do we know of any take-over firm out there with atrocious credit that took over a big real estate conglomerate and must refinance it this year or die? Why yes, I believe we do, but my colleagues who work for that conglomerate get miffed when I mention their parent’s dire straits. So we won’t. But let’s watch what happens.