Sponsors say banks are not lending, investors say sponsors are not willing to chip in more equity and banks stuck in the middle say the impasse between the two parties makes LBO deals a tough sell. Asked if the stalemate was slowing LBO deal flow, one investor joked, "It's hard to slow down a parked car."
Now would seem to be an ideal time for LBO deals as interest rates are historically low, purchase-price multiples are falling and private equity firms are sitting on mountains of cash. But sponsors are finding it difficult to get banks to step up. Joseph Lipscomb, principal of the Carlyle Group, said banks are simply refusing to lend much money. "The irony is acquisition multiples are dropping, interest rates are low, capital is very cheap, but banks are not willing to lend." There have hardly been any new LBO deals in the last two months, he noted. The banks are risk averse right now and are dealing with a bad book of loans, Lipscomb explained. The events of Sept. 11 have only made things worse. One LBO official said that on Sept. 12, banks called to say they would not be committing capital to new deals.
Buysiders have made it clear that they want more equity from sponsors in deals, lowering leverage ratios. One investor said the performance of companies in the current climate is unclear, and higher equity and lowered leverage is required to compensate for the increased risk.
Tom Newberry, managing director at Credit Suisse First Boston, noted that sponsors are reluctant to lower the leverage multiples by increasing the level of equity since it hits their returns. The only other give is if purchase-price multiples drop further, he said, and sellers are reluctant to accept lower prices. Leverage multiples, measured by debt to EBITDA hit a low of 3.3x in September and for loans between $250 million and $500 million it was just 3x. Only last year it was 4x for all loans and in 1996 it was 5.6x.
One banker said equity firms demand percentage returns in the high 20s and with the higher equity piece, the returns would be below where they want to be, maybe in the low 20s. The spate of original issue discounts and the higher coupons also demanded by investors at the moment will further dilute private equity returns. However, Newberry said the real issue is equity and the purchase price rather than the spread or discount. LIBOR rates have hit a low of around 2.5% and so even with higher spreads, bank debt is still an attractive option.
The most high profile potential casualty of the LBO-sponsored deals so far is J.P. Morgan's financing for Collins & Aikman's planned buyout of Textron's auto-trim business for $1.3 billion. An LBO official said the $775 million loan deal has been postponed and could be nixed with investors unwilling to commit right now. High leverage is one of the issues facing the credit, an investor said. Heartland Industrial Partners is the private equity firm controlling C&A. Dan Tredwell, senior managing director at Heartland, did not return calls. Calls to J.P. Morgan officials were not returned by press time. The only other large LBO deal braving the market is Apollo Management's play forIMC Global (see story, page 2).