Bank One has suspended all lending to leveraged buyout firms operating in the middle market pending further review, a well-placed LBO official told Corporate Financing Week, an LMW sister publication. Tom Kelly, spokesman at Bank One, had no comment. Bank One and other lenders have made clear the fact that they will be much more selective in the types of loans they will make, and there is growing concern among leveraged buyout firms about the middle market. General Electric's pending acquisition of Heller Financial, another major lender in the middle market, is adding to the anxiety. "There aren't that many lenders in the middle market like Heller, so we're losing one more player," said one LBO partner.
Some LBO shops consider GE a lender of last resort, according to Street firm officials. "They are hard to work with, often proposing one thing and then coming back with something much less attractive at the end," said one LBO official. "Heller, on the other hand, worked hard to establish a reputation to do what they said they would."
Marissa Moretti, spokeswoman at GE Capital, said the firm is always seeking new ways to meet customer needs. She declined to comment further. Gunner Branson, a spokesman at Heller, declined to comment.
There hasn't been much liquidity in the middle market for some time. Syndicated deals have mostly been usurped by club deals, where a few players lend together as a group. "The loss [of Heller] only exacerbates this," said one LBO player, who is trying to find lenders for an electronics-related business that sells products to telecom companies.
Not everyone agrees on how the changing landscape will play out. Rob Newbold, principal at Graham Partners, believes GE's purchase of Heller will be a boon to the market. GE is not a bank, and as such, isn't subject to the same regulations as Heller, he noted. "It will have the freedom to come up with more creative financing." Graham was expected to complete a deal with GE on Friday as LMW went to press, in which it increased the credit facility on its portfolio company El Dorado Stone. GE and Providence Bank were the two new banks added to the facility. He declined to elaborate on details.
Still, for many LBO players the liquidity crisis has put them in a tough spot. One official said he found himself in a meeting last week with lenders, defending the credit quality of Lucent, a big client, and the fact its receivables are good enough collateral for the loan. "Just a little while back Lucent was considered a blue chip, but not anymore," he said ruefully.
Some market players said it doesn't make sense to some LBOs that banks would halt all business with them. LBO firms are, on the whole, less price-sensitive and willing to pay more in terms of fees and interest rates than other middle market companies, said Erik Maurer, principal at Chicago-based Prospect Partners. "The most important thing for us is to close a deal, and paying an additional 50 basis points won't affect that," he said. Maurer added that LBO firms cannot close deals without senior debt from the banks, and that the Federal Reserve's easing rates has only helped them with their existing business, but hasn't made closing new deals any easier.