LBO Firms Face Lending Drought as ‘Adult Supervision’ Returns
By Edward Evans and Simon Clark
Jan. 29 (Bloomberg) -- Leveraged buyout firms that use debt to pay for takeovers are likely to be at the back of the line for loans as governments bail out banks and bolster lending oversight.
“LBO loans have clearly got to be at the back of any government’s priorities,” said Jon Moulton, founder of London- based private equity firm Alchemy Partners LLP. “If there’s a limited supply of credit, it must be better from society’s point of view for it to go toward supporting existing businesses rather than financing changes of ownership.”
After an unprecedented boom in leveraged buyouts propelled Blackstone Group LP Chief Executive Officer Stephen Schwarzman, 61, and Carlyle Group managing director David Rubenstein, 59, to prominence, the duo are among dealmakers at the World Economic Forum in Davos, Switzerland, this week facing a dearth of banks able or willing to fund their takeovers. And past acquisitions are haunting them as a recession erodes earnings, pushing more companies owned by private equity firms toward bankruptcy.
“Debt has dried up,” Roberto Quarta, a partner at New York-based buyout firm Clayton, Dubilier & Rice Inc. said in an interview in Davos. “You will see more conservative lending practices dictated by banks’ own governance and, more importantly, dictated by governments that are going to play an increasing role in regulation.”
Royal Bank of Scotland Group Plc, the biggest lender to buyout firms in Europe, said last week it would scale back international lending as the U.K. government stepped in to guarantee unspecified losses on toxic debt. The Edinburgh-based bank signed a binding agreement with the U.K. government on how much it will lend and on what terms.
‘Adult Supervision’
“We are most assuredly going to see the hand of government play a much greater role in markets,” Morgan Stanley Asia Chairman Stephen Roach said in an interview. “The question that needs to be answered is what impact that will have on allocating capital and how capital is used in the economy. Letting the system go on without adult supervision led us to where we are today.”
While the U.S. hasn’t nationalized banks to the same extent as the U.K. government, President Barack Obama’s administration may introduce regulations forcing banks to hold more capital, which would curb lending.
“The governments’ ownership is not what’s going to affect the willingness of the banks going forward,” said Howard Newman, president of Pine Brook Partners, a New York-based private-equity firm. “The degree of LBO lending is more a function of the regulatory system than the ownership. And it’s likely to be curtailed when the regulatory system is fixed.”
Schwarzman’s Pressures
Schwarzman, who said in Davos yesterday that 40 percent of the world’s wealth has been destroyed since July 2007, has seen his own company’s shares drop 74 percent in New York trading in the past 12 months.
“The U.S. economy and large parts of the global economy are under enormous stress, and enormous pressures, and are likely to remain that way for some time,” Schwarzman said an interview with Bloomberg Television. “For our existing portfolio, it creates pressures on operations, but fortunately for us, we don’t have maturities in virtually all of our companies for about four years, so that leaves us in a relatively good position.”
The U.K. Treasury said this month that it may raise its stake in RBS to 70 percent from 58 percent as it announced the second British bank rescue in three months. Prime Minister Gordon Brown told reporters he was “angry” with the bank for taking “irresponsible risks” by investing in U.S. subprime mortgages and ABN Amro Holding NV.
RBS Loans
For buyout firms, the government takeover may remove the biggest provider of debt for acquisitions in Europe. The bank arranged $82 billion of leveraged loans last year and $138 billion of debt the year before, according to data compiled by Bloomberg.
RBS was Europe’s biggest arranger of leveraged loans every year from 2004 to 2008, helping to arrange loans for buyouts of companies ranging from German broadcaster ProSiebenSat.1 Media AG to Spanish clothing retailer Cortefiel SA. The loans now trade below face value, implying a higher risk of default and potential losses to holders of the debt.
“I’d be amazed if RBS comes back to leveraged loans,” Moulton said. “They’ve lost an enormous amount of money and they above all have got enormous political pressure to do what’s ‘right’.”
Debt Defaults
RBS will decide whether to lend in leveraged buyouts on a case-by-case basis, spokeswoman Ila Kotecha said. “RBS continues to provide funding for private equity firms,” she said in an e- mailed statement.
Banks’ reluctance to lend may make any recovery in the pace of leveraged buyouts even harder. LBO firms announced $69 billion of takeovers in Europe last year, about a third of the value of deals announced in 2007, Bloomberg data show. The firms may also have to deal with an increase in debt defaults by the companies they own as the recession erodes sales and depletes spare cash needed to meet debt repayments.
Nine out of ten banks expect earnings at private equity- backed companies to fall by at least 10 percent this year, according to a survey of 155 European banks and LBO firms published yesterday by Jefferies International Ltd., a unit of the New York-based brokerage that specializes in mid-sized companies.
Bankers and dealmakers say they don’t expect to see a recovery in takeovers and lending before 2010 at the earliest.
No Quick Recovery
“We don’t think there is any reason to be hopeful about a quick recovery in the credit markets,” said Kurt Bjorklund, co- managing partner at London-based Permira Advisers LLP, Europe’s biggest leveraged buyout firm, who is attending Davos this week along with about 30 private equity executives. “People are going to have to be more creative about finding interesting investment opportunities.”
Stephen Pagliuca, managing director of Bain Capital LLC in Boston said in an interview with Bloomberg Television in Davos yesterday that banks remain unwilling to lend for buyouts as governments look for ways to stabilize the financial system.
“They’ll lend in the end, but the first thing they have to do is get the bad loans off their books,” Pagliuca said. “There’s not enough capital in the banking system.”
Buyout firms may have to reinvent the way they invest, executives say. Instead of seeking outright control of a company, they may buy minority stakes in companies or buy them using only cash from their funds, then sell debt when lenders return at a later date, Clayton Dubilier’s Quarta said.
“There’s clearly still a role for private equity,” Mark Weil, a London-based partner at consulting firm Oliver Wyman, said in interview at Davos. “The better private equity firms are still active, engaged -- and there are tremendous deals out there for them.”
To contact the reporters on this story: Edward Evans in Davos, Switzerland at eevans3@bloomberg.net; Simon Clark in London at sclark4@bloomberg.net
Last Updated: January 28, 2009 18:02 EST |
