Bankers are eyeing the $1 billion bond issuance for Dex Media East-the first part of the acquisition of Qwest Communications International's directories business-as an indicator for the prospective waterfall of leveraged buyouts coming to market this quarter. Although the bank market seems robust enough, questions are being raised over the depth of the bond market. Investors said the directory deal, one of the strongest contenders and a frontrunner for a slew of other financings, should clear the bank market, albeit with a 1/2% flex up to LIBOR plus 4% and a discount. But the bond market could prove tougher for this deal and others, leaving bankers uncertain whether there will be a resurgence for the battered LBO sector.
The acquisition of three directories businesses, the sale of Burger King, Apollo Management's proposed buyout of the coke and ore operations of U.S. Steel and a bidding war for TRW's automotive unit all point to a multi-billion dollar pipeline for bank debt and bonds. "There is increased interest in deals," said Richard Hassard, head of credit products for the U.S. and Europe and a member of the leveraged finance executive committee at CIBC World Markets.
Jim Leech, v.p. at the Ontario Teachers Pension Plan Board and head of Teachers Merchant Bank, which is buying the directories business of BCE along with Kohlberg Kravis Roberts & Co., agrees. "Private equity has been very quiet for the past 24 months, driven by the alternatives people had," he said. "But these pendulums swing, and we are now entering a new phase for all kinds of reasons." One factor has been the reaction to commercial banks retrenching and putting pressure on healthy companies to divest. "Somebody switched the light on in April or May," he added.
But getting the financing done for the proposed buyouts could prove tough, and bankers and investors are watching the LBO deals in the market closely as an indicator of potential future deals. "All deals in the market now are important as they affect market tone and impact investor lending capacity," said Lucine Kirchhoff, managing director and head of Bank of America's syndicated finance research. Already the Burger King buyout has caused concern as the deal received a cold shoulder from bond investors, although one banker said this has largely to do with the tough restaurant retail sector. "Both the bond and bank markets are tight, and this will dampen enthusiasm," Leech said. "Certainly, we won't go back to the leverage levels of the 1990s."
With regard to BCE, there is the opportunity to support higher leverage due to the utility-like confidence in cash flow of the directory business and the high barriers to entry in the market, Leech argued. But with Sprint Publishing & Advertising looking to sell $900 million of junk bonds in addition to BCE seeking about C$600 million and a number of the others looking to tap high-yield financing, it becomes a question of capacity. "Is there a high-yield bond market to get the deals done? It is too early to say whether the market has the ability to absorb all of the paper," Hassard said. "With the current volatile conditions, the high-yield bond market is the challenge."
The Carlyle Group is confident that its Dex Media East deal will clear, with officials at the firm noting that the company has substantial and stable cash flow, which will enable it to de-leverage rapidly. In terms of a resurgence in LBOs, however, Carlyle officials are evasive. "Time will tell," one official said. "At a minimum, there are a number of quality investments out there."