* Getty bonds go from above par to 75 cents on the dollar in
* Leverage in private equity deals rising
* Record junk bond issuance may hide other risky deals
By Greg Roumeliotis
NEW YORK, Oct 17 When private equity firm
Carlyle Group LP bought a controlling stake in Getty
Images Inc in October last year, debt investors fell over one
another to help finance the $3.3 billion deal.
Carlyle raised about $2.6 billion in bank loans and bonds.
At a time when benchmark 10-year Treasury debt yielded 1.7
percent, thanks to the U.S. Federal Reserve's policy of keeping
rates at record lows, the bonds' 7 percent coupon was
irresistible to many investors. For most of the next seven
months, Getty's bonds traded above par on strong investor
demand, reaching a high of almost 105 cents on the dollar in
The bet is no longer looking as good. The global photo
agency has been struggling to compete against startups in the
lower end of the market, where Getty cannot charge a premium it
does for iconic and rare images, such as Marilyn Monroe sporting
a polka dot bikini. In particular, sources familiar with the
situation said Carlyle underestimated startup Shutterstock Inc
, which has aggressively taken market share when it
comes to selling stock images to websites and smaller
businesses. The segment accounts for about a third of Getty's
$900 million in revenue.
"It's not something that has happened just in the last few
months, but I think it has become a realization now. Getty is
secure in the high-end licensed space, nobody is there to unseat
them," said RBC Capital Markets analyst Andre Sequin. But in the
lower end of the market, "Shutterstock really seems to be
pulling away from the competition."
Over the summer, it became apparent to analysts that Getty
would miss its 2013 earnings projections. The value of Getty's
bonds plunged, falling as low as 75 cents on the dollar this
month, according to Thomson Reuters data, and leaving investors
who bought the debt issue facing big losses.
Carlyle and Shutterstock declined to comment for this story,
while Getty Images representatives did not respond to requests
Reuters News, part of Thomson Reuters Corp,
competes with Getty in the market for editorial images, which
accounts for about a quarter of Getty's revenues.
It is still early in Carlyle's investment horizon. Carlyle
has plenty of time to try to reverse Getty's fortunes, as
private equity firms typically invest in companies for three to
seven years before selling them or floating them in the stock
market through an initial public offering.
"Getty is still a business-to-business company and the major
customers of Getty are the Madison Avenue advertising agencies.
If someone is going to be doing things for WPP Plc and
Omnicom Group Inc that are looking for exclusive
photographs, Getty is one of those players," said Moody's
Investors Service Inc senior analyst Carl Salas.
Still, private equity industry and banking sources said such
a sudden drop in the value of the debt of a portfolio company is
rare and illustrates how the Fed's low rate policy and the
search for returns lulled many investors into underestimating
the risks of buying some kinds of junk bonds.
More such setbacks could be in store for investors.
Issuance of junk bonds hit a record $255.8 billion in the United
States in the first nine months of the year, up 10 percent from
a year ago, according to Thomson Reuters data. Last month saw
the most prolific issuance of high-yield bonds in history.
Further, leverage in private equity deals - which measures
debt as a factor of a company's cash flow and hence its ability
to service the obligations - has risen steadily since the
financial crisis, averaging 6.2 times earnings before interest,
tax, depreciation and amortization (EBITDA) so far this year, up
from 5.3 times in 2012 and 4.7 times in 2011, according to
market research firm Pitchbook.
"The debt multiples are definitely going up and you can
find yourself in the same kind of situations that happened
before the 2007-2008 bubble," said Kelly DePonte, managing
director at private equity advisory firm Probitas Partners LLC.
Carlyle's investment in Getty, which came the same month as
Shutterstock's initial public offering last year, was driven by
the growth in digital media, as more websites and other media
businesses require images and other media content.
In October 2012, Carlyle bought 51 percent of Getty from
Hellman & Friedman LLC, another private equity firm, which had
taken the company private in 2008 for $2.4 billion. Getty's
co-founder and chairman, Mark Getty, and his family rolled in
their stake as part of the deal.
To fund the deal, Carlyle arranged a $1.9 billion loan -
which is now trading at around 90 cents on the dollar - from a
consortium of banks led by Barclays Plc, as well as
issued $550 million in bonds, which were snapped up by major
fund managers, including Pacific Investment Management Co,
AllianceBernstein Holding LP and BlackRock Inc.
As a result, Getty's leverage, by one measure, jumped to 7.1
times EBITDA from 4.6 times, according to Standard & Poor's
Ratings Services. This added $850 million to the company's debt
pile, according to Moody's. As is the case with many leveraged
buyouts, both credit agencies downgraded the rating of Getty's
Barclays and BlackRock declined to comment, while Pacific
Investment Management and AllianceBernstein did not respond to
requests for comment.