CTXS - Elliott's Double Dip Spares Citrix Banks' Blushes

Summary

• When Elliott Management and Vista Equity Partners agreed to acquire technology company Citrix Systems for $16.5B in January, leverage came easily and cheaply.
• If the market were so bad that the banks couldn’t sell it at all, Elliott wouldn’t be able to close its purchase of Citrix.
• Elliott has the advantage of making all of its investments out of a single fund, which means that owning Citrix debt and equity doesn’t create a conflict among its different investors if Citrix gets into financial distress later and has to be restructured.

By Breakingviews

Paul Singer has landed in a once-in-a-cycle opportunity. When his hedge fund, Elliott Management, and private equity firm Vista Equity Partners agreed to acquire technology company Citrix Systems ( CTXS ) for $16.5 billion in January, leverage came easily and cheaply. Market conditions then turned, leaving the debt backing the Citrix deal languishing on banks' balance sheets. Now, Elliott has bought a chunk of that debt at a knock-down price, potentially benefiting from the banks' pain twice over.

For Bank of America ( BAC ), Credit Suisse ( CS ) and Goldman Sachs ( GS ), selling the secured bonds at less than 84 cents on the dollar is deeply unpleasant. It will leave them with $700 million of losses , according to Reuters. When they originally agreed to finance the buyout, they had committed to charge interest no higher than a certain level, yet by the time they came to sell the debt to other investors, the market had moved against them. With the interest on the debt fixed, they had to sell the bonds at a discount.

That isn't really Elliott's problem. True, if the market were so bad that the banks couldn't sell it at all, Elliott wouldn't be able to close its purchase of Citrix. That might be one reason the fund has stepped in to buy $1 billion of those bonds itself, according to Bloomberg.

Also attractive is that discount, though. Elliott has the advantage of making all of its investments out of a single fund, which means that owning Citrix debt and equity doesn't create a conflict among its different investors if Citrix gets into financial distress later and has to be restructured. Big asset managers like Blackstone ( BX ) or Apollo Global Management ( APO ), in contrast, have separate credit and equity funds that answer to separate investors, and could end up at odds with each other if things go bad.

The banks will be pleased to get shot of a burden on their balance sheets. They can now direct their lending firepower elsewhere, in an environment where rates are higher, and chalk Citrix up as a case of bad timing. Elliott, meanwhile, has now had a good deal from the Wall Street firms both as a borrower and then as a lender. Singer has turned one lemon into two glasses of lemonade.

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