US buyout firm Kohlberg Kravis Roberts has presented potential investors with details of a £9 billion ($18 billion, €13 billion) debt package, as it looks to finance its £12 billion acquisition of UK health and beauty chain Alliance Boots.
The 400 investors at yesterday’s presentation, which was given by KKR’s Dominic Murphy and Boots deputy chairman Stefano Pessina, were told the retailer’s earnings would equate to 1.7 times the interest charges on the debt. Although this is below the two times coverage ratio traditionally considered as the standard for buyout deals, it is well above the one-times interest cover employed in some recent deals – suggesting the firm is deliberately adopting a more conservative approach in an uncertain credit market.
A banking source said: “There have been some early commitments and most organisations will come back by the end of July. It is a creditworthy business with 80 percent of EBITDA coming from the healthcare business, which is highly cash generative. I think most investors at the meeting liked what they saw.”
The news comes amid concerns that recent wobbles in the US credit markets are starting to be seen in Europe too. Yesterday Bloomberg reported that several important asset managers, including Fidelity and Lehman Brothers, were avoiding debt from leveraged buyouts, although the institutions involved declined to comment.
Given its scale, the Boots deal is felt by many to be a test of whether investor interest in leveraged loans will continue, despite the associated risks. The deal is the largest European buyout to date, and the first involving a company in the FTSE 100, an index of the UK’s biggest listed companies.
A potential investor in the Boots debt said: “The credit crunch is making the level of debt you would offer in a deal harder to raise. This will have a knock-on effect on pricing with more cautious structures being offered, but Boots is fine because it has hedged its interest rate exposure.” When the deal was signed people were predicting interest rates would go up and KKR factored that in, he added.