'Falling knife' slices values of high-profile PIPEs

As the stock prices of many financial services companies collapse, Warburg Pincus, TPG and Corsair Capital are suffering publicly due to possibly ill-timed investments in MBIA, Washington Mutual and National City, respectively.

As financial services companies of all stripes continue to see their stock prices plummet, three private equity firms that recently purchased stakes in quoted US financial institutions are feeling the pinch.

Three high-profile recent deals, all private investments in public entities (PIPEs), are currently deeply underwater – MBIA, Washington Mutual and National City, which received equity infusions from Warburg Pincus, TPG and Corsair Capital, respectively. Current market conditions mean significant, albeit unrealised, losses for the three private equity firms.

The scene brings to mind the old trading axiom: don’t catch a falling knife, ie invest in a “cheap” stock that has much further to fall.

At today’s market prices, Warburg Pincus is showing a loss of roughly $615 million (€387 million) from its investment in MBIA Insurance Corporation, the largest bond insurer in the US.

Last December, the New York-based global private equity firm paid $500 million for 16.1 million shares of MBIA. The purchase price of $31 per share represented a 3 percent premium over MBIA’s closing stock price of $30 the day before the deal was announced. Warburg Pincus also received warrants to purchase additional shares at $40 per share.  

Pummeled by the deterioration of global credit markets and whispers of instability, MBIA’s stock sank to $13.85 in early February, at which point Warburg purchased an addition $300 million in common stock in the hope of shoring up MBIA’s Aaa credit rating.  Warburg Pincus paid $12.15 per share at the time of that transaction.

Following Moody’s downgrading of their credit rating and the rapid loss of public market confidence in the US financial sector, MBIA’s shares have fallen to $4.55 per share at time of press, an 85 percent decline from what Warburg Pincus paid in the initial investment last year.

For its part TPG is facing an unrealised $1.1 billion loss from its investment in home mortgage giant Washington Mutual. In April, as bank balance sheets continued to suffer from exposure collapsing housing values, TPG led a consortium to inject $7 billion in equity into the Seattle-based bank.

The Fort Worth, Texas-based firm committed $2 billion to Washington Mutual at $8.75 per share, paying a 33 percent discount below the stock’s closing price the day before the deal was announced. TPG also received warrants to buy 57.1 million shares at $10.06 apiece.

Washington Mutual subsequently announced that TPG founder David Bonderman would rejoin the bank’s board of directors, a position he held from 1996 to 2002, and that it would shift its focus away from the collapsing mortgage market and towards retail banking.

Despite these strategic shifts, Washington Mutual stock has continued to founder. The stock traded at $3.74 at time of press a roughly 57 percent decline from TPG’s initial investment.

Just two weeks after the Washington Mutual deal was announced, New York-based Corsair Capital anchored a $7 billion investment in National City, a Cleveland based-bank suffering from similar ailments as Washington Mutual. A Corsair-led consortium committed $985 million to the savings and loan, agreeing to purchase the company’s stock at $5 per share, a 40 percent discount below the previous day’s closing price. Shares of National City were trading at $3.56 at time of press, a 29 percent decline from the Corsair purchase price.

MBIA, Washington Mutual and National City have all issued statements within the last three weeks assuring investors of their financial solvency and discrediting rumours of possible collapse.  

The decline of the share prices to territory well below the PIPE prices has some worrying similarities to the decline of telecommunications-related PIPEs during the late 1990s and early 2000s. Many private equity firms, eager to put equity to work in a tight credit environment, bought large minority stakes in publicly traded telecom and internet companies, many of which went bankrupt.