Insight: Getty captures risks of Fed's easy money policy

Thu Oct 17, 2013 11:29am EDT
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By Greg Roumeliotis

NEW YORK (Reuters) - When private equity firm Carlyle Group LP (CG.O: Quote) 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 May.

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 (SSTK.N: Quote), 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 for comment.

Reuters News, part of Thomson Reuters Corp (TRI.TO: Quote), 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.   Continued...