Bond Buyers Less Friendly to LBO Deals

The easy credit that is the lifeblood of private equity-led buyouts has tightened a little bit lately.

Bond investors "have begun to not so quietly push back at several prominent transactions," the New York Times reports Tuesday.

A sustained slowdown in buyout financing could be expected to chill M&A activity, deal a serious blow to the equity market and weaken one foundation of today's buoyant Wall Street job market.

Both Thomson Learning and U.S. Foodservice recently had to scale back planned bond offerings to finance their respective buyouts. The Times also cites a 7.5 percent decline in newly-public Blackstone Group's share price Monday as "another sign that investors may now be less optimistic about the buyout boom."

"In the last couple of days, we've seen some cracks. Private equity people have for a long time now gotten funding at very low rates and very liberal terms. The market has known for a long time that this was ridiculous," high-yield guru Kingman Penniman told the Times. Penniman is president of KDP Investment Advisors, which specializes in high-yield bond research.

The newspaper may be stretching when it cites another indicator: only seven deals were announced this Monday, compared with 43 a week ago and 84 on June 4. An important bit of context that's left unstated is that deal activity, like most Wall Street business, typically shrinks during weeks bracketing big vacation periods and inflates during preceding weeks when participants scramble to complete deals before the holiday.

A better read on buyout investors' temperature may come later this week when ServiceMaster and Dollar General are expected to price deal-related bond offerings, and when Cerberus Capital Management begins a road show to sell up to $62 billion of bonds for its $7.4 billion buyout of Chrysler. Two of the largest buyout deals ever, First Data (acquired by Kohlberg Kravis Roberts) and TXU, are waiting in the wings with debt sales planned for later this year.