Private equity deals hit as banks curb lending for leveraged acquisitions

For KKR & Co LP, the private equity firm behind some of the world’s largest leveraged buyouts, the acquisition of US outdoor retailer Mills Fleet Farm for a little more than $1.2bn should have been a formality. The New York-based firm, run by legendary dealmakers Henry Kravis and George Roberts, was almost a handshake away from clinching the deal in late November. But then the junk debt markets went into a tailspin, and banks shied away from lending for such deals after losing money on the syndication of some leveraged buyout loans, and junk bond investors started to head for the exits. KKR knocked on the door of more than 20 banks, including some it rarely borrows from, as it sought financing for the deal, but none would provide the full debt package the buyout firm was seeking, according to sources familiar with the events. The sources asked not to be identified because deliberations were confidential. In the end, KKR was able to raise the money itself and clinched the deal last week. It issued and underwrote more than $700mn of debt, and used its own capital markets desk to sell most to pension funds and other asset managers, a laborious process that took more than a month. KKR owns a small portion of the debt, the sources said, though they were not specific about the amount. KKR, declined to comment on the Mills Fleet Farm deal or disclose the cost of the debt raising. Most private equity firms, though, are unable to underwrite and sell debt for their own leveraged buyouts. A string of leveraged buyout deals have stalled in recent weeks as the financing from banks dried up, in one of the biggest challenges for the private equity industry since the 2008 financial crisis. While the new year’s plunge in global equity markets is making company valuations more attractive for buyout firms, the tumult in the debt markets is set to prevent many deals from getting done. For example, sales of scaffolding supplier Safway Group Holding and specialist care provider North American Partners in Anesthesia are at a standstill, private equity and banking sources said, as are the auctions of government contractor PAE, insurance brokerage Confie, and the software assets of Dell Inc. The companies all declined to comment. The problems in raising financing first surfaced in mid-November after banks failed to sell $5.6bn worth of loans and bonds for US data storage provider Veritas, a unit of Symantec Corp. Carlyle Group had agreed to buy Veritas for $8bn in August in the biggest deal by a private equity firm in 2015, and banks’ failure to drum up interest in Veritas’ debt sent shockwaves through the leveraged buyout world. Banks, which faced hundreds of millions of dollars of potential losses on unsold debt, saw the syndication of other leveraged buyout financings struggle as well.  A $925mn acquisition of eBay Inc’s enterprise unit by a consortium led by Sterling Partners struggled to get funds, though it made it across the finish line. Carlyle and Symantec have also said they expect to close the Veritas deal later this month, four weeks later than they had hoped.  The financing for Apollo Global Management’s $1bn buyout of industrial manufacturer OM Group stumbled in syndication, as did Kraton Performance Polymers Inc’s $1.4bn acquisition of pine chemicals producer Arizona Chemical Company. The financing turmoil comes as dry powder – the amount of uninvested funds raised by buyout firms – hit a six-year high of $261.5bn in December in North America, data from market research firm Preqin showed. “Leveraged buyouts were already challenging because of a run-up in equity valuations and regulatory curbs on leverage,” said Steven Kaplan, a University of Chicago finance professor who does research on private equity. “So the recent volatility makes it even more difficult for private equity to put money to work,” he added.  Even after the recent stock market declines, company valuations are still near historical highs. In the past two years, banks have also been scaling back their supply of the riskiest junk-rated loans used by buyout firms to purchase companies because of tougher US regulations restricting the amount of leverage.