"You've Got to Know When to Fold Them!"
Banks advised to walk away from big deals
By Henny Sender in New York
Published: February 14 2008 22:03 | Last updated: February 14 2008 22:03
Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.
This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.
But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.
“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”
However, such a radical shift could have a dramatic impact on the markets. The presence of private-equity buyers is one factor that has helped boost stock prices.
“If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it,” says one lawyer specialising in private equity issues for a major New York law firm. “But desperate times call for desperate measures.”
So far, leveraged buy-outs have usually collapsed when the private-equity firms involved – including Blackstone and Cerberus – have withdrawn from transactions.
Such moves have occurred as banks have been working behind the scenes to persuade private equity firms to abandon deals. Such indirect approaches are designed to prevent target companies from filing suits seeking to make sure deals close.
However, the chances of banks abandoning buy-out deals – such as those for Clear Channel Communications, the radio station owner and outdoor advertising company, and BCE, the Canada-based telecoms group – are growing as the market prices for the leveraged loans used in such transactions continue to fall.
US regulators are pressing banks to account for these loans at market prices while they keep them on their books.
Already, it is understood that one bank has marked down its share of the loan used in the Clear Channel buy-out to 85 cents on the dollar.
By contrast, lawyers are telling the banks that if they walk away from deals, their biggest liability would be equivalent to the so-called reverse break-up fee that private equity firms pay target companies when deals fail to close. These fees usually amount to about 2 per cent of the total value of a deal, or about $500m in a large buy-out.
Lawyers say there could be other costs for the banks, such as covering the expenses buy-out firms incur while doing their homework on bids.
Further, they do not rule out the possibility that banks could have to pay greater damages in litigation.
What is sure is that banks are giving greater thought to dropping out of deals. “We are already there in terms of the economic pain,” said the head of debt capital markets at one major Wall Street firm. “Banks sitting on $30bn of debt for one deal are looking at $4.5bn of losses. That is enough to play hardball.”
Copyright The Financial Times Limited 2008
By Henny Sender in New York
Published: February 14 2008 22:03 | Last updated: February 14 2008 22:03
Leading banks are being advised that it would be cheaper to walk away from big buy-out deals than incur further losses on their funding commitments, increasing the chances that more high-profile private equity transactions will collapse.
This advice from lawyers contrasts with the conventional wisdom that banks would risk serious damage to their reputations if they were to drop out of deals.
But legal advisers argue that the break-up fees banks would owe in such cases would be far lower than the write-downs they would have to make on their loans, given the current cataclysmic conditions in the capital markets.
“It is the tipping point argument,” said a senior partner at one of the biggest private equity firms, who asked not to be named. “The banks have so many issues with their balance sheets that they are considering a new policy.”
However, such a radical shift could have a dramatic impact on the markets. The presence of private-equity buyers is one factor that has helped boost stock prices.
“If you want to come up with news that could make the Dow drop another 500 or 1,000 points, this would be it,” says one lawyer specialising in private equity issues for a major New York law firm. “But desperate times call for desperate measures.”
So far, leveraged buy-outs have usually collapsed when the private-equity firms involved – including Blackstone and Cerberus – have withdrawn from transactions.
Such moves have occurred as banks have been working behind the scenes to persuade private equity firms to abandon deals. Such indirect approaches are designed to prevent target companies from filing suits seeking to make sure deals close.
However, the chances of banks abandoning buy-out deals – such as those for Clear Channel Communications, the radio station owner and outdoor advertising company, and BCE, the Canada-based telecoms group – are growing as the market prices for the leveraged loans used in such transactions continue to fall.
US regulators are pressing banks to account for these loans at market prices while they keep them on their books.
Already, it is understood that one bank has marked down its share of the loan used in the Clear Channel buy-out to 85 cents on the dollar.
By contrast, lawyers are telling the banks that if they walk away from deals, their biggest liability would be equivalent to the so-called reverse break-up fee that private equity firms pay target companies when deals fail to close. These fees usually amount to about 2 per cent of the total value of a deal, or about $500m in a large buy-out.
Lawyers say there could be other costs for the banks, such as covering the expenses buy-out firms incur while doing their homework on bids.
Further, they do not rule out the possibility that banks could have to pay greater damages in litigation.
What is sure is that banks are giving greater thought to dropping out of deals. “We are already there in terms of the economic pain,” said the head of debt capital markets at one major Wall Street firm. “Banks sitting on $30bn of debt for one deal are looking at $4.5bn of losses. That is enough to play hardball.”
Copyright The Financial Times Limited 2008
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