What If It’s More Than Just A Financing Crunch?New Worries About The Economy May Pressure LBO Sponsors To Walk Away

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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]


To be sure, most of the recent talk about the biggest deals has focused on financing worries. But a recent report from Reuters indicates that many in private equity may be getting nervous about the deals they signed earlier this year.
"I've got to believe that if you have a signed agreement, you're pretty nervous right now," Ian Snow, CEO of SPG Partners, tells Reuter’s Jonathan Keehner and Michael Flaherty.
“Until now, private equity firms were seen as holding reluctant banks to the terms on which they had agreed. But if the economy spirals into a recession, it'll likely be the private equity firms seeking the exit doors,” team Keehner and Flaherty write.
They use First Data as a test case, writing that “a sudden economic downturn” might force even KKR to grant concession to banks on First Data. Well, that’s already happened, as we learned last night. The next shoe to drop could be the buyers asking the sellers to reconsider, which might mean that several deals could get unwound.
Some are skeptical that the deals could be unwound. The buyers would likely have to pay hefty break-up fees if they walked away, and unless a company looks headed for certain disaster, many firms may choose to risk future losses or depressed returns from the acquisitions than booking break-up fee expenses now.
First credit, now recession worries hit LBOs [Reuters]

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