A page one story in the Wall Street Journal, “Market’s Jitters Stir Some Fears For Buyout Boom,” discusses how creditors are suddenly rediscovering that they can say no to deals that don’t offer them reasonable terms. This is coming as quite a shock to private equity firms, who were used to getting their own way and were able to extract concessions that were what one might politely call unusual: “cov lite” deals (meaning few or no covenants) and payment in kind (meaning the borrower can pay in crappy paper if it is short of cash, a practice we haven’t seen since the overwrought phase of the 1980s buyout boom).
The $3.6 billion financing for a big deal, the $7.2 billion acquisition of US Foodservice by KKR and Clayton, Dubilier & Rice, was “rejected by investors”, leaving underwriters holding the unsold securities (a smaller deal for Canadian company Catalyst Paper was also pulled, and financings for other deals, such as Myers Industries and Magnum Coal, were postponed). A hung underwriting is a rare and painful event (the deal will presumably be repriced, at a loss for the underwriting group. Underwriters usually get “circles,” which are pretty firm indications of interest, before pricing a deal. I gather in this brave new world of finance that was another practice that went out the window). Other deals, such as Dollar General, are moving ahead.
The odd thing is that both US Foodservice and Dollar General were reported to be having trouble last week. The Journal doesn’t give enough detail as to why the two deals had different outcomes, but one suspects that the Dollar General group was more willing to bend than the US Foodservice cohort.
The most revealing comments, however, weren’t about the deals in particular but the general environment:
Taken together, the setbacks are stoking unease across Wall Street. “The biggest risk we face — and there are a lot of things that contribute to this risk — would be a very big crisis in the credit markets,” Lloyd Blankfein, chief executive of Goldman Sachs Group Inc., told an audience at The Wall Street Journal’s Deals & Deal Makers conference in New York. A “sentiment shift,” he said, “could unravel very quickly” the vast wealth that has been created by the takeover boom.
At the same conference, Treasury Secretary Henry Paulson called the market jitters “a wake-up call to focus on excesses” that have developed in recent years in the debt markets.
For a toad like that to hop out of Blankfein’s mouth says the industry is rattled.