Easy credit is diminishing in buyout market
The $2.1-billion buyout of Guitar Center Inc. announced Wednesday shows that the appetite for takeovers hasn’t died, but financing deals is becoming more expensive as nervous lenders demand higher interest rates and other concessions from borrowers.
Lenders fear that easy credit for takeovers could come back to haunt them if buyout targets get into financial trouble. In recent days, the deepening woes of the sub-prime mortgage market have reminded Wall Street of the risks of cheap credit.
U.S. Foodservice, a unit of Dutch supermarket firm Royal Ahold, on Tuesday postponed a planned $650-million bond sale because it couldn’t find enough buyers. Proceeds from the offering were to finance U.S. Foodservice’s leveraged buyout by Kohlberg Kravis Roberts & Co. and Clayton, Dubilier & Rice Inc.
Separately, lawn-care products company ServiceMaster Co. this week revised its $1.15-billion bond sale to scrap a portion of the deal with notes that potential buyers viewed as too risky.
“We’re going to have a pretty rocky summer figuring out what it all means,” Mark Nunnelly, a managing director at Boston-based buyout firm Bain Capital Partners, said at a conference Wednesday sponsored by Dow Jones & Co. in New York. Bain is leading the buyout of Westlake Village-based Guitar Center.
Private equity buyout firms will be seeking about $300 billion in financing in the next six months after announcing a record $539 billion in deals this year, Bear Stearns Cos. said.
Lloyd Blankfein, Goldman Sachs Group Inc.’s chief executive, told the Dow Jones conference that the private equity boom had not topped out.
Transactions in which buyout firms take over and force poorly performing companies to change aren’t “going out of style,” Blankfein said. Still, he said, highly speculative deals “may go by the boards.”
Carl Icahn, who has spent more than four decades on Wall Street buying and selling companies, said private equity firms have enjoyed “a walk in the park” in terms of financing deals in recent years, as yield-hungry lenders and investors have fallen over themselves to provide credit.
Speaking at the conference, Icahn said of the deal mania, “I think it’s peaked.”
Investors have demanded higher yields on junk bonds in recent weeks, pushing the annualized yield on an index of 100 bonds tracked by KDP Investment Advisors to 7.78% as of Wednesday, compared with 7.08% in mid-May.
Bond investors “have drawn a bit of a line in the sand,” said Brian Arsenault, high-yield strategist at Morgan Stanley in New York. “Investors are saying ‘I have my pick of quite a few high-yield offerings over the next few months, so I am going to be a little more selective.’ ”
The deal market also has been rattled by proposals by some in Congress to change the tax structure of buyout firms and hedge funds, lifting the top tax rate from 15% to 35% on certain of their investment earnings. That could make takeover deals less lucrative.
Asked about the proposed legislation, Treasury Secretary Henry M. Paulson Jr. said Wednesday that “I don’t believe it makes sense to single out one industry.” He warned that a tax increase could have “unintended consequences.”
Shares of buyout giant Blackstone Group, which went public June 21 at $31 a share, fell for a third straight session Wednesday, losing 83 cents to $29.92.
