September 15, 2011 7:05 pm
This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com
Private equity firms that have not yet secured committed financing for new bids are less likely to see their transactions materialize in coming weeks, three financing sources told dealReporter.
Banks across the board have expressed their reluctance to agree to commit to financing in the current market without indexed flex provisions, these sources said.
The first two sources and a fourth leveraged financing source pointed to Bank of America (NYSE: BAC) and Deutsche Bank (NYSE: DB) as two lenders that have expressed reluctance to sign up new commitments in the current market. The first source also added JP Morgan (NYSE: JPM) and Wells Fargo (NYSE: WFC) to the list of banks that have expressed reluctance to make new commitments.
Two of the sources noted that index flex – usually pegged to a high yield bond index – are unlikely to be attractive to sponsors.
PE firms “simply won’t do deals with market index provisions because there is no limit to the downside for them,” said the first financing source, who works with lenders and sponsors on financing LBOs.
The Carlyle Group is “still doing the work” on its potential take-private bid for Pharmaceutical Product Development (NASDAQ:PPDI), said a fifth lending source claiming knowledge of the situation. This source also said he believed “it is not a done deal by any means.”
Carlyle was moving slowly through its exclusivity period at the end of August to consider whether to make a take-private bid for PPD, this news service previously reported. At that time, a source familiar with the deal said Goldman Sachs’ Private Equity group, which was planning to team up with Carlyle, had pulled out of the arrangement.
Also, ConvaTec - and its backing sponsors Nordic Capital and Avista Capital - is currently in the process of seeking financing to rival the USD 6.3bn Apax Partners-led consortium offer for Kinetic Concepts (NYSE:KCI), which was made in July. The competing bid was made at the tail-end of Kinetic’s 40-day go-shop period, which ended on 21 August.
The third financing source left the door slightly ajar for the possibility that a sponsor could negotiate a financing commitment in the current market.
“Banks are focused on getting the biggest bang for their buck,” he said. “They want to satisfy their best clients and make sure they are backing deals that they are sure will get done.” This source added that banks have begun to insist on indexed over capped flex provisions since Labor Day.
The first two sources were adamant that uncommitted PE bids would not be able to secure funding at this point in time.
Aside from negotiating commitments, PE firms may look to hold out as long as possible in the hopes that negotiating terms will become favorable again.
“There is an expectation another window will open but that could be more towards the end of this year,” the first financing source said.
The fourth leveraged financing source said this week could be defining in terms of the willingness of banks to commit to financing new deals in the near future with Blackboard (NASDAQ:BBBB), privately held Go Daddy and BJ’s Wholesale Club (NYSE:BJ) all expected to be launched.
Banks focus on committed loans
Banks will have trouble syndicating loans and are likely considering the prospect of taking losses on some of the commitments they have made in the last few months onto their balance sheets, the first source said. This source noted there has been around a 200 basis point shift in pricing since the May to June period.
“If you were to say [pricing] was out plus 350 bps at the start of the summer, now you would say it’s out plus 550… 200bp is a lot,” the same source added.
The Apax consortium’s financing for its Kinetic bid is expected to price in the second half of this month, a source told this news service in August. JP Morgan Chase and Bank of America have committed to provide debt financing for this deal.
The financing includes a combination of borrowings up to USD 2.6bn under a senior secured loan facility, with equity financing of USD 1.75bn, USD 2.15bn in aggregate principal amount of senior notes, and the option of using a USD 900m in senior unsecured bridge loans and/or USD 1.25bn in senior secured second lien bridge loans should the notes not be issued by the time of closing.
The first and the second source said they believe deals with committed financing “will get done one way or another.” Banks will “push it out” as long as they can and possibly take some of the losses onto their balance sheets, the first source added.
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