The showdown continues between Kohlberg Kravis Roberts & Co. and the banks that have committed to finance it’s $26 billion takeover of First Data Corp. After having failed to reach a deal with the banks, KKR is now delaying the sale of the loans until next week, Bloomberg reported.
The First Data deal is widely seen as a test of investor appetite for buyout debt. The banks committed to the financing before rising subprime mortgage defaults led to a credit contraction that has resulted in dramatically higher borrowing costs. At the time, selling buyout loans to hedge funds and other investors was a relatively simple matter. These days investors are demanding larger yields, which means they will only agree to buy the loans at a discount. This would create large losses for the banks or force them to keep the loans on their books until the credit market improves.
The exact terms of the loans are not widely known. KKR plans to finance the takeover with something like $14 billion of bank loans, which one veteran credit banker estimated to be priced at 250 basis points over LIBOR. KDP Investment Advisors, an adviser to credit investors, is telling clients to pay no more than 94 cents on the dollar. “That would produce a floating interest rate of 10.75% on the loans, or roughly 500 basis points over Libor,” KDP tells Market Watch.
Earlier reports indicated that KKR had agreed to abandon the nearly pure Cov-Lite structure of the deal by including a leverage ratio covenant in the loan documentation. But that covenant—which DealBook has described as “toothless”—may not satisfy many investors who still might still view the terms as too loose for the perceived risk involved. Part of the ongoing dispute between KKR and its banks may be how tight those covenants should be.
On Tuesday, the Federal Reserve’s Open Market Committee is widely expected to announce guts it its interest rate targets. It could be that the KKR and its banks hope the cuts will revive investor interest in First Data loans, making the loans easier to sell at some level closer to par.
KKR May Delay First Data Loan Sale on Terms Dispute [Bloomberg]
First Data LBO may be costly for banks involved [Market Watch]
K.K.R. and Banks Said to Dispute First Data Terms [DealBook]
Leveraged Buyouts
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Goldman Sachs
Goldman Testing Covenant Lite Market
Shopping The Laureate Education Senior Debt
By John Carney 
Goldman Sachs and other underwriters are attempting to syndicate $775 million of covenant-lite term loans, Reuter’s Mike Flaherty reported last night. The loans were made to fund the buyout of Laureate Education at a spread of 325 basis points over Libor, and were fully funded by the underwriters at the close of the deal. Now they are testing the strength of the secondary market for the so-called Cov-Lite loans, which have gone out of favor with many investors.
Cov-Lite loans were a product of the recently deceased extravagant credit market. Unlike traditional bank loans, they are stripped of nearly all of the covenant restrictions that lenders typically rely upon to keep track of the financial condition of borrowers.
“Restriction-free loans used to be the rage, and debt investors couldn’t get enough of them during the LBO frenzy. But debt investors got spooked by the subprime mortgage mess, and Cov-lite, as it became known, went the way of the dinosaur (at least for now), right there with its pal Pik-Toggle,” Flaherty writes.
Unlike the financing for the big buyout deals that are still waiting to close, such as KKR’s acquisition of First Data, the Laureate deal has already been funded, leaving the lenders with no way of pressuring the borrowers into accepting more stringent terms. The loans will likely be sold below par, leaving the original lending syndicate with losses. The depth of the discount, however, may be a sign of the market’s appetite—or lack of appetite—for the loans in the pipeline deals that lenders have committed to make but have not yet funded.
In short, many are looking at the Laureate syndication to demonstrate just how screwed the banks may be on the buyouts scheduled to close later this year.
Goldman to be educated on Cov-Lite appetite [Reuters]
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Leveraged Buyouts
What If It’s More Than Just A Financing Crunch?
New Worries About The Economy May Pressure LBO Sponsors To Walk Away
By John Carney 
Alltel. Clear Channel. First Data. Harrah’s. Hilton Hotels. Sallie Mae. TXU.
Those are the names of some of the biggest buyout deals that may face big financing challenges if they are to close on schedule. With investors for highly leveraged deal debt getting scarce, there has been a lot of speculation whether one or more of these deals might fall apart. But renewed concerns about a possible recession pose a new danger to the deals—the private equity buyers may decide that the prospects of the companies not be as bright and shiny as they seemed during the boom times of just a few months ago.
[More after the jump]
While some people are reminiscing about financial panics of the past, or even grokking the Great Depression, it’s not all despair, poverty and austerity yet for the kings of finance.
As Dennis Berman’s The Game column points out in today’s Wall Street Journal, the gilded age and its attendants—extravagance and excess—continues to roar on in some on the more fashionable precincts.
“Just last week, Apollo Management LP chief Leon Black threw a beach bash for about 200 family friends out in the Hamptons,” Berman writes. “The group enjoyed catering from Nobu and Daniel, two of Manhattan’s priciest eateries, while taking in a private concert by Tom Petty & the Heartbreakers.”
It’s hard not to wonder if something might have seemed a bit off to the partiers when the Heartbreakers launched into 2002’s “When Money Wasn’t King.”
If you reach back in your memory
A little bell might ring
About a time that once existed
When money wasn’t king
If you stretch your imagination
I’ll tell you all a tale
About a time when everything
Wasn’t up for sale
Credit Crunch Lowers Boom On Deal Excess [Wall Street Journal
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Leveraged Buyouts
The Day The Music Died
Banks And Private Equity Stop An LBO Tango
By Bess Levin Everyone in town is scrambling to find out the latest news on the sale of Home Depot’s wholesale supply unit. As first reported by Dennis Berman on the Wall Street Journal’s Deal Journal, the banks providing financing for the deal have balked at the terms. (Earlier versions hinting that this was on the way came from the New York Times and the Financial Times.)
The situation has been described as “ugly” and “hostile.” The private equity firms involved — Bain Capital, Carlyle Group, and Clayton, Dubilier & Rice — have been trying to cut the purchase price. Home Depot was reportedly ready to accept a $1.2 billion haircut on the $10.3 billion deal. But the banks — J.P. Morgan Chase & Co., Lehman Brothers Holdings Inc. and Merrill Lynch & Co — are still resisting providing funding, and are said to be preparing for a possible lawsuit from their private equity clients.
According to Berman, there is a possibility that “the deal could fall apart entirely, which would be a massive blow to Home Depot and a threat to the LBO pipeline that remains — roughly $225 billion of financing for deals, in fact.”
In short, the deal is being looked at as a test case for how the various players in the leverage buyout business will deal with the credit crunch and housing market slowdown. And right now it looks like everyone is flunking, at least if the grades are based on “playing well with others.”
We spoke with some people at Lehman this morning who were not working on the deal but are familiar with its progress. One described the situation as “radioactive.” We’re not even sure what that means but it sure doesn’t sound healthy!
So far, it seems we haven’t been able to crack the deal to get at real sources. We’re not making any progress. What are you hearing? Leave a comment or send an email to tips@dealbreaker.com.
Home Depot: A 2X4 Upside the Head [Deal Journal]
Home Depot Talks On Unit Get Hostile [Wall Street Journal]
Private equity executives make no secret that relatively plentiful credit is the fuel power the surge in giant leveraged buyout deals, allowing the buyout shops to make acquisitions on companies which might have been untouchable in earlier eras. So it comes as a bit of a surprise to hear so many of them seem to be warning us about rising debt coupled with looser lending standards. Carlyle founder William Conway has rang the alarm bells with a memo of his that was “leaked” to the press everywhere. Remarks of Leon Black and Steve Schwarzman also have been read as warnings.
The latest entrant is the chief executive of BlackRock, Larry Fink. BlackRock is not a private equity shop—it’s an asset management firm that was spun-off of the Blackstone Group way back in 1992. But Fink’s background is in debt and private equity. He was a bond-trader at Credit Suisse and worked at Blackstone before the spin-off. And now he’s telling the Financial Times that the leveraged debt fueling the buyouts may be the next subprime mortgage crisis.
“If I was the chairman of the Federal Reserve, I’d be paying more attention to that because, to me, this is going to be tomorrow’s problem,” Mr Fink said in an interview with the Financial Times. “Standards have deteriorated to levels that we never even dreamed that we would see.”
So has Larry gone over to the other side? Perhaps. His business does compete for investment dollars with private equity firms and hedge funds, and so he may have a vested interest in seeing the current golden age of private equity come to an end.
But there’s a more paranoid theory that was suggested to us by a source (who requested that we keep him anonymous) who works at a smaller private equity shop. His theory was that the big shots in private equity were beginning to worry that the loose credit standards were allowing others in the buyout market to make bids that might once have been exclusively within the reach of the Blackstone’s, Apollo’s and KKR’s of the world. The relatively easy access to credit was fostering competition in the once cozy world of private equity, and driving-up the prices of the companies they want to take private. So they want to talk investors out of getting involved in lending into the buyout market in order to make it harder for competitors to raise funds.
Of course, as even our source admitted, this theory is more than a bit paranoid. But just because you are paranoid doesn’t mean Henry Kravis isn’t thinking about how to crush you.
BlackRock chief warns on leveraged loans [Financial Times]
Investment bankers preparing bank buyout pitches in the wake of the announcement that Sallie Mae will be taken private by a syndicate of private equity firms and banks, says Greg Zuckerman in this morning’s “Heard on the Street” column.
“Even as the coffers of private-equity firms have bulged in recent years, Wall Street has always assumed that buyout specialists would be wary of certain industries, such as financial services,” Zuckerman writes.
But the deal to take Sallie Mae private—and especially the fact that Blackstone also bid on Sallie Mae—seems to have revealed that private equity firms may have an appetite for financial-services companies and even banks. Possible targets include KeyCorp, Countrywide Financial Corp., CIT Group Inc. and iStar Financial Inc, according to Zuckerman.
One reason banks were long seen as “off limits” to private equity was the concern that regulators might not approve such deals. “Banks are heavily regulated deposit franchises that hold the savings of individuals, so regulators might be unwilling to allow a buyout firm to make a leveraged purchase,” Zuckerman writes.
But as private equity firms such as Blackstone have grown and become more diversified—some are starting to look more like full-fledged investment banks than pure buyout shops—bank regulators may be more tolerant of buyouts in this area. What’s more, private equity firms seem to have grown keenly interested in purchasing companies in heavily regulated sectors such as power utilities and highways.
Has Sallie Deal Put Banks In Play for Private Equity? [Wall Street Journal]
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