Leveraged buyouts are back in the news this morning. The papers write that the Clear Channel Communications deal, which collapsed in recriminations between the private-equity firms who agreed to buy it and the banks who agreed to finance the LBO (debt-laden deal), is back on after a settlement brought all parties in for some pain in order to avoid a long and expensive court battle.
The Wall Street Journal and Financial Times both front the news on their investing sections and The New York Times puts it on C3. The deal for the radio giant would lower the price by $1.2 billion, or 8 percent, to $18 billion, and the buyers would have to pay a higher interest rate on their loans, which would still be likely money-losers for the banks.
The deal was one of the more prominent casualties of the credit crunch when it fell apart in late March after the banks who’d agreed to fund it backed out because they would have lost $2.7 billion or so instantly, because the price of debt like that had fallen so far since the deal was reached (the FT says the banks have already written down the loan commitments). The banks accused the buyers, Thomas H. Lee Partners and Bain Capital Partners, of getting cold feet for paying too much. They instantly sued each other and the trial was set to begin yesterday but was delayed as a deal neared, the NYT and FT say.
Whither the Clear Channel shareholders? A deal’s a deal, except on Wall Street. The FT says it’s “not clear” if the company’s board will agree to the lower price, but we’ll bet they will. It and its shareholders will be glad to not be taking an even bigger loss, and the papers say one of the biggest investors was deeply involved in the renegotiation.
The FT notes that the buyers had agreed to put up just 13 percent of the deal price in their own equity. It’s too early to say this is a sign of thawing in the credit markets, as the Journal points out on B6 that another radio deal, this one the $530 million LBO of Cumulus Media collapsed yesterday.
For me, a discount
Bloomberg writes that a European banking trade group is looking into conflict-of-interest rules after some private-equity firms bought their own debt at steep discounts.
The wire service says Kohlberg Kravis Roberts and PAI Partners have purchased loans from their takeover deals in the last few months and KKR is in talks to buy more.
Why does this matter?
They also create potential conflicts because buyout firms may join bank groups that determine borrowing rules for the companies they own.
“The concern is that a basic principle of syndicated lending, that each lender gets treated the same, is being violated,” Clare Dawson, executive director of the Loan Market Association in London, said in an interview.
Stupid lending, or slow economy?
Small-business loans are the latest pocket of credit land feeling the crunch, the Journal says inside Money & Investing.
The paper puts it well:
Missed payments and losses on small-business loans are surging at banks throughout the country that were so eager to pad their profits that they essentially threw typical underwriting methods out the window. Some lenders doled out small-business loans as if they were credit cards, relying solely on the personal credit scores of borrowers.
That meant many loans were made without assessing a company’s strategy or finances, even by banks that avoided subprime mortgages. Now the economic slowdown is leaving lenders with little or nothing to collect on many small-business loans in case of default.
The WSJ says banks “haunted” by their missteps are reining in credit, making operating a small business more difficult. It says one-fifth of Bank of America’s reserves for bad loans last quarter were for those made to small businesses. How did they lose so much money?
Among the selling points: entrepreneurs could borrow as much as $100,000 through an unsecured credit line even if they had been in business for just one day.
It’s hard to know, but we wonder how much of the losses is due to stupid lending and how much is because of the slowed economy?
MBIA takes another hit
In other credit news, bond insurer MBIA lost $2.4 billion last quarter, in large part due to a huge loss on credit-default swaps—contracts that insure against a security’s non-payment. But analysts said it will likely keep its AAA credit rating, which will stave off a domino effect of billions of dollars in bond write-downs for banks. The Journal’s Heard on the Street column takes the company to task for fluffing its accounting, saying it’s reminiscent of the “dot bomb” era.