Red-Flag Sale: LBO Debt Deals Face New Snags
By CARRICK MOLLENKAMP, JASON SINGER and SERENA NG
July 20, 2007
Banks raising nearly $40 billion in buyout-related debt for Chrysler Group and the United Kingdom's Alliance Boots PLC are being forced to sweeten terms for investors and face delays in their sales, in another sign of turbulence in global debt markets.
Chrysler is being taken over by Cerberus Capital Management, a New York hedge fund, and is raising $20 billion in loans as it separates from DaimlerChrysler AG. Alliance Boots, a chain of U.K. drug stores and a wholesale pharmaceutical-distribution firm, is being taken over by Kohlberg Kravis Roberts & Co. and is raising the U.S. dollar equivalent of $18.4 billion.
In both cases, bankers are shopping interest payments to investors that are around a half percentage point more than originally planned. And in both cases, they're putting off plans to close the deals in the next few days. The Alliance fund raising might be delayed by months, people familiar with the situation said. The Chrysler debt sale is expected to close next week.
It marks a potentially important twist in the debt cycle. After months of seemingly insatiable appetite for corporate debt, bond and loan investors began pushing back strongly against buyout deals in June, forcing bankers to put off fund raising for some midsize buyouts or to make the loans to these companies directly.
The latest developments suggest these huge deals -- which recently came to market with few hitches -- are also facing resistance. "Two or three months ago, the banks could have said that this is the price, take it or leave it," says Gary Jenkins, a portfolio manager at Synapse Investment Management, a London debt investor. "Now the price is being dictated by investors."
Deutsche Bank AG, J.P. Morgan Chase & Co. and UniCredit SpA are leading the Alliance Boots deal, among a total of eight banks involved. J.P. Morgan, Goldman Sachs Group Inc., Citigroup Inc., Bear Stearns Cos. and Morgan Stanley are handling the Chrysler debt sale, which will ultimately reach $62 billion.
Several factors drive the shifting environment. Debt investors generally have become more risk-averse in recent weeks, as they've seen turmoil sweep through the market for bonds backed by U.S. subprime-mortgage debt.
At the same time, the pipeline for corporate-debt sales is huge, which has put bond investors in a position to become choosier. Banks sit on a backlog of about $220 billion in leveraged-buyout deals that need to come to the market for refinancing in the U.S., and more than $50 billion in Europe.
The banks are in a potentially precarious position, because they have committed to the financing in many of these cases, including Chrysler and Alliance Boots. If they can't sell the debt to investors, they might need to keep it themselves, exposing them to much more risk than they planned to take on.
Some bankers say that a tighter financing environment is already squeezing the pipeline of new leveraged buyouts, as the market waits for the current supply to be sold down. But the debt market hasn't completely dried up.
Yesterday, for example, a fund controlled by Qatar said it made a proposal to acquire U.K. supermarket chain J Sainsbury PLC for more than £10 billion ($20 billion), or 600 pence a share. The proposal includes financing the acquisition with £6 billion provided from a syndicate of banks, said Delta (Two) Ltd., the London investment fund that made the takeover proposal.
"It's a blip, a passing storm," said Sameer Al Ansari, executive chairman and chief executive officer of Dubai International Capital, a large private-equity firm which has $6 billion of assets under management.
Chrysler's debt sale was launched in late June, and initial investor commitments were due this week, though that deadline is likely to be pushed to next week to give investors more time to analyze the deal.
The Chrysler debt includes $8 billion in loans for Chrysler's financial unit and $12 billion in loans for the money-losing automotive business.
The latest terms being offered to investors on the Chrysler Financial debt include an interest rate of around 8.4% on $6 billion in loans and 10.9% on a $2 billion piece. Those terms, which could still change, are respectively a quarter and a half percentage point higher than originally planned.
Chrysler's auto business could have to pay interest of at least 9% on $10 billion of loans and more than 12% on a $2 billion slice. That's around half a percentage point more than first planned. Bankers are also working tougher performance requirements, known as covenants, into the deal and plan to sell the debt at a discount to its face value.
Investors are more receptive to debt from Chrysler Financial, because the financing company has a track record of profits. But many are less enthusiastic about lending to the auto business, which is burning through cash.
"There are too many questions still about Chrysler's future," said one investor who attended a presentation by bankers on the deal. "Cerberus has to make the financing more attractive for us to buy into it." He added, "I don't want to be left holding the bag if it fails."
KKR's £11 billion purchase of Alliance Boots is Europe's largest leveraged buyout to date, and the financing is being closely watched as a barometer of the global credit markets.
Late yesterday, the banks were working to identify new terms of the financing to win over investors. If those terms don't work, the banks would have to decide whether to change the conditions of the loans further -- or pull the offering for several months, people familiar with the situation said.
Their £11 billion takeover would be financed by six loans or credit facilities.
The largest loan is an eight-year £5.05 billion term loan. About two weeks ago, the banks met with investors and pitched that loan at a price that yields 2.75 percentage points above the London interbank offered rate, or Libor. Investors had to commit by today, people familiar with the matter said.
But, in recent days, when the banks returned to their top 15 or so potential investors, they found reluctant takers and began asking whether there would be appeal in the loan if it would be priced to yield at three percentage points or even 3.25 percentage points above Libor.
Additionally, it could be sold at a discount of 1% to 2% of face value, these people said. As of late yesterday, the banks were waiting to see whether those terms grabbed potential investors.
A spokesman for KKR didn't return calls seeking comment.
--Alistair MacDonald and Gina Chon contributed to this article.
S&P Downgrades Piggyback-Loan Bonds
Standard & Poor's kept worries about mortgage credit in focus yesterday by announcing downgrades of 418 classes of bonds backed mainly by so-called piggyback loans.
Nearly 80% of the total -- which represented an original balance of about $3.8 billion -- were from classes rated triple-B-plus or lower, S&P said.
There were eight classes of triple-A-rated bonds from three transactions. A New Century Financial-affiliated issuer was responsible for three of the triple-A classes downgraded, and a Goldman Sachs-related issuer accounted for the other five.
Piggyback loans are second mortgages typically taken out by borrowers who can't otherwise obtain a 20% down payment to buy their home. Borrowers will take out a first mortgage for 80% of the purchase price and then a second, or piggyback, mortgage for much or all of the remainder. |
