Crunch time for LBOs
The investor revolt in the leveraged loan market during June and July was long overdue and much needed. But have the excesses of the past few years left the LBO market teetering on the precipice of a far more serious credit squeeze? Louise Bowman reports.
IT CAN’T BE often that Henry Kravis, co-founder of Kravis Kohlberg Roberts, has to eat his words. But that is something that he might soon be forced to do if the leveraged loan market does not quickly recover from a bad case of the frights it caught during June. Just one month earlier, in May, Kravis had described market conditions as a "golden era" for buyouts. In June, though, financing packages that had been put together for several of his firm’s deals were facing emergency restructuring or even complete postponement in the loan market. By July, the $18 billion loan financing for KKR’s acquisition of UK firm Alliance Boots had been pulled as investors balked at the aggressive, covenant-lite terms. It is not Kravis but his banks that are faced with this problem – and that means that for sponsors such as KKR, the golden era could already be over. The double-digit leverage multiples and aggressive debt financing packages that have characterized the LBO market for some time have led even the most casual observer to conclude that some sort of correction must come. And come it has, with a series of transactions being either restructured or shelved altogether as a result of investor pushback (see The ones that didn’t get away).