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Tuesday, July 17, 2007

Banks and Bridges to Nowhere

by Calculated Risk on 7/17/2007 12:39:00 AM

Earlier today, Brian and I were discussing the cancelled debt syndication for the KKR acquisition of Dutch retailer Maxeda BV.

Kohlberg Kravis Roberts & Co. canceled plans to raise 1 billion euros ($1.4 billion) of loans for Dutch retailer Maxeda BV as investors shun high-yield debt.

More than 20 financing deals have been postponed or restructured in the past three weeks as losses from the U.S. subprime mortgage rout rattled investor confidence.
The key point is that the acquisition is still going forward, but the bridge loan from Citigroup and ABN Amro is now a "pier" loan; i.e. a bridge to nowhere.

Bloomberg expands on this point: Goldman, JPMorgan Stuck With Debt They Can't Sell to Investors (hat tip PC)
Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.

The banks have had to dig into their own pockets to finance parts of at least five leveraged buyouts over the past month ... The cost of tying up their own capital may curb earnings and stem the flood of LBOs ... the five largest U.S. investment banks more than tripled their lending commitments to non-investment grade borrowers during the past year to $174 billion, according to their regulatory filings.

Just three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged, said Mike Belin, U.S. head of equity derivatives strategy at Deutsche Bank AG in New York. A couple of years ago, a majority of deals included a financing contingency ...
This reminds us of the Burning Bed incident mentioned in the Bloomberg article, and also in the WSJ in May:
In a famous event dubbed the "Burning Bed," First Boston Corp. in 1989 made a $457 million bridge loan to the purchasers of Ohio Mattress. When the junk-bond market collapsed soon afterward, First Boston couldn't refinance the loan and ended up owning most of Ohio Mattress. Credit Suisse had to inject additional capital into First Boston, culminating in a full takeover.
Even adjusted for inflation, $457 Million is chump change compared to the current commitments of the five largest U.S. investment banks.