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To: Real Man who wrote (339219)	7/27/2007 9:07:00 AM
From: Giordano Bruno	Respond to of 436258

We will close higher today due to Mondays standard M&A activity. Or not. -g- The Domino Effect: As LBOs Lose Luster, A Stock-Price Prop Falls By HENNY SENDER July 27, 2007; Page C1 For the past few years, private-equity firms have helped to lead the stock market higher by offering rich premiums for the shares of companies they were seeking to take private. This important underpinning to the market might now be losing its power. (See Breakingviews commentary.) As the cost of financing rises, private-equity firms will lower the price they are willing to pay -- if they buy at all. That's because debt-market turmoil shows signs of changing the economics of the deal business. Inexpensive loans with flexible terms have allowed private-equity firms to bid aggressively for the shares of takeover targets like SLM Corp -- known as Sallie Mae -- Freescale Semiconductor or TXU Corp. But interest rates on the junk bonds and junk-rated loans behind this boom have been rising as investors become more leery of owning them. The interest rate on a junk rated B junk bond has risen to 3.7 percentage points above Treasury yields from 2.8 percentage points a month ago. DEALS EMAILS • Don't miss another deal: Click here to automatically sign up for Deals Alert emails. • And get all the day's Deal Journal blog posts delivered straight to your inbox: Click here to automatically sign up for the new Deal Journal Newsletter.As the debt becomes more expensive and the terms less flexible, deal making becomes less attractive. "For the last couple of months the market was being driven by mergers-and-acquisitions activity," says Steve Bleiberg, who runs the $6 billion Legg Mason Global Asset Allocation group. "The underlying economic fundamentals were mixed...but there was a premium being built into the markets on the view that any company could be in play because it was so easy to obtain the financing to do a deal. "But with the buyers' strike that's going on in the debt markets -- where it's clear that it's not going to be so easy to get that financing -- the stock market is sitting up and saying maybe these takeover premiums aren't warranted any more," Mr. Bleiberg says. Bankers are now delivering to private-equity clients the news that debt is going to be far more expensive and that investors won't back deals that entail too much borrowing or easy terms. Some bankers say that financing deals might cost a full four percentage points more than just a few weeks ago for some companies. On a billion-dollar loan, that amounts to $40 million. This spring, some private-equity firms boasted that $100 billion deals were in their sights, including some in cyclical industries that had previously been too volatile to consider. Wall Street analysts distributed lists of dozens of such potential targets to their clients. But the market's indigestion with borrowing now makes that unlikely. One important contributor to the turmoil is a corner of the debt market known as collateralized loan obligations. These complicated securities hold hundreds of corporate loans that are packaged together and sold to investors around the world in pieces, with different levels of risk. Some bankers say as much as 70% of the loans that have ended up in CLOs in the past few months were loans to either finance private-equity firms' purchases of target companies or to finance dividend payments to the private-equity firms after their takeovers were completed. The investments have been sterling performers, largely because corporate default rates hover near record lows. But cracks are showing up amid fears that defaults could rise. Issuance of CLOs soared to a record $57 billion in the first half of 2007. That has since slowed to a trickle. So far this month, just $1.9 billion of CLOs have been sold, according to Standard & Poor's Leveraged Commentary & Data. "Leveraged finance's cash engine -- the CLO market -- has ground to a halt," S&P noted in a written commentary on July 19. Now, investors are demanding better returns. Some riskier slices of CLOs, which will take early losses if loans go bad, are now selling at more than 10 percentage points above benchmark interest rates, more than triple the level at which they were sold two months ago. This comes at a critical time, because banks are in the process of selling more than $200 billion of loans to investors. CLOs have been big buyers of those loans, and now many of them aren't getting sold. Most notably, on Thursday, Chrysler's bankers said they would have to hold roughly $10 billion of loans they couldn't sell in a financing deal tied to the auto maker's takeover by Cerberus Capital Management. The hedge funds and other money managers issuing CLOs have traditionally asked investment banks to accumulate the loans in virtual warehouses as these instruments were being put together. Now some banks are taking these loans out of the warehouses and selling them, because the banks don't want to hold too many corporate loans when market conditions are shaky. Bankers are telling CLO managers they can no longer persuade investors to buy loans with unusually easy terms, such as "covenant-lite loans" that don't place strict performance requirements on borrowers. That is helping to drive down the value of such loans and spook the debt market.