Friday Letter Gloomy Days

The credit boom appears to be faltering, which is bad news for the many pending LBOs that have yet to be financed.  

It seems summer cannot come soon enough for the large buyout firms and their bankers. A pause for sun on a far-flung beach will give debt market participants – borrowers and lenders alike – respite to catch their breath after a breakneck deceleration of market activity. One veteran leveraged finance head in London told PEO yesterday that it was surprising even to him how quickly conditions had changed from the frenzy of lending just a few weeks ago to the go-slow that is now emerging.

He said the market is alive with talk of a second serving of egg in the face for KKR in under a week.  After shelving indefinitely a refinancing for Dutch retailer Maxeda on Monday, the US buyout firm is said by bankers to be keen not to suffer any indignities with the financing of its buyout of the pharmacy giant Alliance Boots. The syndication is due to complete today.

It is looking tough. KKR has already conceded on terms and structure, gone to great pains to explain the deal and now has little room to manoeuvre on a syndication that, according to a European commercial banker we spoke to earlier this week, has attracted limited interest.

He said: “Of course it could be a game of poker and the banks might all have taken their pieces. Alliance Boots is a rock-solid credit at the senior level.” His view was that the buyout firm would likely lean on large investors such as Babson Capital and Alcentra to take a little more debt than they might initially have planned and then to present the deal again to other investors in six weeks, when market jitters had calmed, allowing the original backers to sell down their positions.

As a face-saving exercise, this would be something of a halfway house and unlikely to assuage market concerns about investor appetite. But bankers say it may also present an opportunity for lenders who are mulling whether to go back to their private equity clients and renegotiate those deals that may have been just a little too borrower-friendly.

Ironically, the current lending slow down may partly be a reaction to the buyout industry’s own success and not just problems in the US sub-prime market. Toby Nangle, fixed income investment manager at Baring Asset Management, has counted over $500 billion worth of incomplete cash-financed LBOs and MBOs still outstanding, and the bond and loan markets know that private equity will come knocking sooner or later asking to borrow money that they have bid with but do not have.

Nangle expects the announced LBOs alone to lead to more than $300 billion of fresh calls from the bond and loan markets. He points to signs of credit rationing for the riskier deals in recent weeks, and has counted 28 corporate bond or loan deals representing around $17 billion that have been pulled since the 22nd June. In the previous twelve months, not a single deal had been pulled.

Perhaps it is fitting that KKR, a pioneer in so many respects, should lead the way in Europe with its financing woes. Its troubles, although far from unique to the firm, are allowing loan investors to re-price the market. KKR et al can only hope it will return refreshed from a summer break.