Copying and distributing are prohibited without permission of the publisher.


Banks Pitch Hyper Aggressive LBO Deals

20 Apr 2002

A slew of highly leveraged financing packages are on the table for buyout firms, indicating the barbarians may be returning to the gate this summer. But market players are divided on whether all the deals will clear the market. J.P. Morgan and Morgan Stanley have proposed a 4.75 times debt to EBITDA offer for buyout firms looking to acquire Xerium from Apax Partners. This is hot on the heels of Deutsche Bank's offer of at least 5 times leverage for buyout firms looking at the Tyco plastics business. Similar pitches for Berry Plastics and Burger King are also said to be floating. "Leverage multiples are increasing, and it seems that institutions will be comfortable with levels approaching five times," said Rick Schnall, a partner at buyout firm Clayton, Dubilier & Rice.

Schnall said he believes the high-yield market ­ not the bank loan market -- is the prime driver, even though the institutional bank loan market has come back quite a bit. But some investors and bankers are not sure how far the envelope can be pushed on leverage levels. One banker said multiples can be pushed in this market for the right deal, with features such as good asset coverage or solid recurring cash flow, but others said no way to deals above 5 times. "It will obviously be both sector and company specific," said Richard Hsu, a portfolio manager with Franklin Templeton Investments. "With today's market, higher leveraged deals definitely have a better chance of getting done. Factors that seem to be driving these higher multiples include both a very healthy high-yield bond market in 2002 and the short supply of senior secured paper. Are we going to return to the levels we saw in 1997? No, but this is definitely a borrower's market that will support more incremental leverage."

Lucine Kirchhoff, managing director and head of the floating-rate syndicated finance research group at Banc of America Securities, drew a line between the deals that are being pitched and those that have already cleared the market. "Leverage levels have been rising, and financial sponsors shopping is up, based on optimism that the economy is healthy and financing will be available," she said. "But I'm not ready to say these deals will happen at the aggressive leveraged levels being discussed." Instead, she asks, "Are we reaching an inflection point where leverage levels are being pushed too much? This is as hot as we have seen it," Kirchhoff remarked about the "B" market.

But bankers and investors also warned that even the superhot "B" market would not tolerate a credit with a single B rating. "CLOs drive this market and they are ratings driven. If the paper does not have the right rating it will not get done," one investor chimed. Highly leveraged deals will find it tough to get Ba3 ratings, especially now the agencies are being highly stringent post-Enron, a banker added. Officials at the banks involved either declined comment or did not return calls.

20 Apr 2002