Lets hope all those buy backs are self financed.
Debt on Sale: Banks Grease
The Leveraged-Loan Machine
By HENNY SENDER
October 10, 2007; Page C1
Against the gloom that descended on credit markets, banks have pulled off a surprising feat: selling $30 billion of loans for leveraged buyouts by offering some unusual bargains. They also accepted losses on the sales.
Now comes the hard part: what to do about the other 90% of the LBO loans in the pipeline.
The deal-spinning machine of private-equity firms, which was in high gear when credit markets seized up over the summer, was one of the first casualties of the credit-market problems. Gone was the buyout shops' access to cheap loans.
Gone, too, even more suddenly, was investor demand for the loans -- and the price for them fell in step. That left Wall Street banks such as Citigroup Inc., Credit Suisse Group and J.P. Morgan Chase & Co. holding some $400 billion in debt they had promised as financing for purchases private-equity firms had in the works globally.
Unless the pace of sales quickens in the coming weeks, banks could be stuck holding these hundreds of billions of dollars of loans for months to come -- a big risk if the economy slows and corporate profits weaken. That could reignite tensions with the private-equity firms they have agreed to finance the deals for and increase the possibility of a fire sale to unload the debt.
With the help of a Federal Reserve rate cut a few weeks ago, the banks have defied expectations and managed to sell significant chunks of the debt, including for closely watched deals such as Kohlberg Kravis Roberts & Co.'s $26.4 billion buyout of First Data Corp. Banks led by Citigroup and Credit Suisse sold $9.4 billion of loans for that deal to investors -- almost twice as much as they originally planned.
In late September, a $1 billion slug of the debt for Carlyle Group's and Onex Corp's $5.75 billion buyout of Allison Transmission also sold relatively briskly, helped by the same bargain price of 96 cents on the dollar as First Data, according to Standard & Poor's.
Nothing was more telling about the banks' apparent success than the scene at the W Hotel in midtown Manhattan last week. On Oct. 1, dozens of potential lenders crowded into the ballroom of the hotel, where Warburg Pincus was making its pitch for financing a planned $3.67 billion buyout of eye-care firm Bausch & Lomb Inc. The meeting was so crowded, according to people who were there, that the overflow had to be accommodated in an anteroom where a television set was set up.
Yet for all the relief among bankers, the sales haven't come easily -- or profitably. They have offered only the highest-quality portions of the debt for sale, and that at a loss. They have also made concessions that could come back to hurt them, such as selling the debt at a discount while the huge supply raises questions about how long both Wall Street's united front and the upbeat mood will last.
So far, what has been sold is a drop in the bucket. Standard & Poor's Leveraged Commentary & Data estimates that about $30 billion of a total of $310 billion in North American LBO loans have been sold so far. As much as $100 billion in debt is due to come to the market in the next 30 days alone.
"The real story is the next part of the capital structure," says Leon Wagner, chairman of GoldenTree Asset Management LP, a $12 billion alternative investment firm and a large investor in the debt of buyout deals. His firm bought a small piece of the debt of First Data.
A week before the W Hotel presentation, banks successfully orchestrated the sale of the first big chunk of the $24 billion debt for the First Data buyout. They surprised even themselves by selling almost double the amount planned. The bad news: to accomplish that they agreed to sell the debt at 96 cents per dollar, locking in losses after their fees were figured into the deal.
In some cases, private-equity firms whose deals the debt is financing were among the bigger buyers of the debt. KKR, for example, expressed interest in purchasing a large amount of First Data debt, eventually receiving a $400 million allocation, according to people familiar with the deal.
The banks had to work hard to convince investors that they shouldn't wait on the sidelines for a bargain. With Allison Transmission, for example, the banks came up with a promise of 60-day protection on price.
Yet many hedge funds decided to sit on the sidelines, assuming that on day 61, when the guarantee expired, they could pick up the debt for less money in the secondary market. That was one reason the banks had to come up with a longer protection period for First Data.
Still, with investors cautious and still smarting from the credit crunch, moving any of the loans contributed to the impression of a market on the mend.
So far, the deals that have come to market aren't those vulnerable to slowing economic growth. For example, Bausch & Lomb, of Rochester, N.Y., is a health-care company, a sector that is relatively immune to economic cycles. "It is of a size and sector where the capital market has an appetite," says Chris Turner, head of capital markets for Warburg Pincus.
And TXU Corp., whose debt is considered among the most desirable because of the value of the company's assets and the straightforward nature of the utility business, will come to market possibly as early as later this week. TXU will likely have to make concessions on its $37.5 billion debt package, including a change in the interest rate offered, a covenant on financial performance and a more limited term during which the company can opt to not pay cash interest. But investors will likely expect a discount on TXU -- just as they got on First Data.
Write to Henny Sender at henny.sender@wsj.com |
