The Wall Street Journal-20080122-New Year- Old Problem- Buyout Debt
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New Year, Old Problem: Buyout Debt
Many on Wall Street hoped the new year would dislodge a pileup of debt commitments waiting to be moved off banks' ever-constrained balance sheets.
But as February approaches, the logjam is still in place, likely sticking banks with more losses, while squelching lending, too. That could hurt companies with solid credit as well as those buyout loans needing refinancing.
"We're in a credit crunch," said one senior investment banker. "There's no money around for new deals."
The market will get another test as a group of underwriters led by Deutsche Bank AG and Bank of America Corp. begin unloading $7.25 billion in loans related to the buyout of casino operator Harrah's Entertainment Inc. by Apollo Management LP and TPG. Last week, the banks began marketing the bonds at a discount of 96.5 cents on the dollar, for a deal widely seen as one of the most desirable credits created during the 2006 buyout boom. The gambling business is generally less susceptible to an economic downturn than other sectors.
The underwriters are scheduled to hold more investor meetings this week and a price for the offering, if it goes forward, will likely be fixed in the coming days.
The banks now sit on $158 billion in leveraged loans in the U.S., which are credits with a high default risk, according to Standard & Poor's Corp. That pool includes private-equity deals valued at $88.25 billion that have been funded by the banks but not fully syndicated, according to data tracker Dealogic.
"At this juncture, it feels like some of the tougher high-yield bond deals aren't going to be clearing off people's balance sheets anytime soon," says Paul D. Scanlon, portfolio manager at Putnam Investments in Boston.
That is bad news for the latest slate of leveraged bond issues, a group of deals that includes the $20 billion buyout of Clear Channel Communications Inc. by private-equity firms Bain Capital Partners LLC and Thomas H. Lee Partners LP. Other expected debt sales include Blackstone Group LP's $6 billion buyout of transaction processor Alliance Data Systems Corp. and Tribune Co.'s $8.2 billion going- private deal, according to Thomson Financial.
In November, a group of banks underwriting Cerberus Capital Management LP's buyout of Chrysler tried to sell $4 billion in loans related to the deal. The banks offered the debt at 97 cents on the dollar but they delayed the sale indefinitely due to tepid interest. It remains unclear when the underwriters, a group that includes J.P. Morgan Chase & Co. and Citigroup Inc., will try to tap the credit markets again.
"It looks bleak," says Steven Miller, managing director at Standard & Poor's, of the market environment. "All the leverage has been drained out of the system."
Some in the market worry that banks' inability to get rid of the backlog will constrain other types of lending, including commercial loans to companies with solid credit. "There's always a risk this will impact the preservation and implementation of capital," says Vanessa G. Spiro, a partner with Jones Day who specializes in leveraged lending.
If corporate borrowers need to refinance existing credit facilities or take out new loans, lenders may be less willing to step up with terms the companies can afford. That, in turn, could lead to more defaults if companies are unable to refinance existing credit facilities.
Credit-market participants say they have seen little evidence this is happening. Commercial loans to the small and midsize companies that make up most of the economy are generally handled by regional banks that aren't involved in the leveraged-loan business. Still, bank lending has tightened and if conditions worsen, companies' access to capital could be constrained further.
The outlook isn't bright. S&P's index of 15 large leveraged loans hit its lowest level ever of 92.79 Thursday, down from 94.81 at the end of 2007. The index, which gives the average price of these bonds, includes buyout deals First Data Corp. and TXU Corp., among others. The index is calculated twice-weekly, on Tuesdays and Thursdays.
The yield premium measured by the index has widened considerably since the end of the year to 4.64 percentage points above the London interbank offered rate Thursday, from 3.96 percentage points at year's end. That suggests investors view the bonds as risky.
Some bankers say it will be many months before the dust settles. "The question is how far does this credit contagion spread," says Stephen Gaines, the head of KPMG Corporate Finance LLC. "The banks are sitting on their hands."
