How do you shift £9bn?(3)

As the lead underwriters on the Alliance Boots deal - JP Morgan, Deutsche Bank and Unicredit - prepared to reveal their syndication plans for the deal’s debt, Toby Lewis examined the potential options available to them.

The taciturn underwriting banks running the Alliance Boots debt syndication have left the debt markets speculating what their next move might be. The bankers selling the £9 billion (€13 billion, $18 billion) of debt are having serious difficulties convincing investors to buy it, according to senior sources in the debt markets. PEO has consulted the market to predict the next step for the banks in syndicating the debt.

“The Boots bid has become a bit of a bellwether of the market, it is a poster child of modern day venture capitalism under excessive amounts of scrutiny. Most investors are waiting to see what the banks decide to announce before investing,” said one banker at a European investment bank.

The majority of those canvassed hazarded a guess as to what the latest changes to the package by the banks may be. Consensus suggests the banks are repricing the senior debt to 300-25 basis points and are offering original issue discounts. This is a new development in the credit markets over the last month, especially in the US, where banks opt to offer some debt at a discount eating into their fees. 

It is also believed this discount may not be enough to satisfy investors who are still worried about the turmoil which has hit the debt markets on the back of the US sub-prime crisis. Before these problems debt investors were buying senior debt at 200-25 basis points, which some market participants say is the greatest, rapid shift they have seen in the debt markets. The junior second lien and mezzanine debt on the Boots deal will also need to be re-priced.

Kohlberg Kravis Roberts has apparently told the banks that the terms it pays are non-negotiable and the underwriting fees paid by the buyout firms are there for banks to shoulder risk something they have not had to do throughout the latest buyout boom, says one European banker.

KKR was not available for comment.

Lead underwriting banks JP Morgan, Unicredit and Deutsche Bank have also declined to comment about their plans for the debt syndication; however market practitioners are second-guessing their plan of action.

Zak Summerscale, managing director of Babson Capital Europe, says: “Banks could choose to enter a stabilisation agreement where they sell some of the debt at a discount and agree not to trade the rest before a defined period.” This option would allow investors to take large tranches of the debt at a discount without being undercut by competitors, while leaving the debt market time to settle.

“Or they could choose to hold it all. This second option would be a big mistake because there would be a big cloud of debt waiting to be traded, probably at a decent discount, meaning investors would hold back from the market until then.”

The consequence of the decisions made by the underwriting banks will be keenly felt by the entire market. Tom Attwood, managing director of Intermediate Capital Group, says: “The CDO market is closed which has led to a flight to quality in the debt markets as a consequence, leading to pricing going up. The whole market is looking to see how the Boots deal turns out.” Whether the general problems in the debt markets settle very much depends what happens over the coming weeks, he says.

All market participants canvassed concur that the Boots deal has been hampered by the size of the debt package on offer, combined with the severe problems in the CDO market.

But the investors also note the current low level of defaults in portfolio companies are in marked contrast to the increased yields on all types of debt.  The hope of many of the buyers is the current Boots debt sale and other tranches of debt sold in the US and Europe will be a rich picking for bargains. With this attitude, no wonder the underwriting banks are wincing at giving a discount.