Bain Sees Signs of Healing in Loan Market

NEW YORK (Reuters) – A senior executive at private equity firm Bain Capital said on Friday that he is seeing the “first sign of healing” in the leveraged loan market, key for buyout firms to be able to strike large deals and refinance existing investments.

“Right now, the major money center banks and those parties who are going through their own troubles with their balance sheet are not at this point in a position to commit to large-scale fundings,” said John Connaughton, managing director at Bain Capital.

“The good news is that we are seeing signs of life from those parties who would ultimately be the holders of that debt,” he said, talking ahead of the Reuters Private Equity and Hedge Funds Summit, which starts Monday. “That’s the first sign of healing, that people are interested in the asset class of leverage loans.”

He cited a second-lien deal recently done by HCA Inc, a hospital operator that Bain Capital along with other investors bought for $21 billion in 2006. HCA in February sold $310 million of eight-year senior secured second-lien notes in the 144a private placement market, according to IFR, a Thomson Reuters service.

“In order for the money center banks to begin to make this market work properly again, they have to see willing buyers on the other side, they have to know that the risk they’re taking to commit to the financing will result in a successful deal when it goes to syndication,” he said.

Boston-based Bain is one of the world’s largest private equity firms and manages about $75 billion of assets, according to its website. It has investments in companies including radio operator Clear Channel Communications, retailer Michaels Stores and restaurant chain Outback Steakhouse.

Private equity firms raise money from investors such as pension funds to invest in buying companies, which they aim to improve and either sell or float a few years later. During the 2005-07 boom when leverage was easy to get, buyout firms piled increasingly high debt levels on their acquisitions.

An upcoming problem for the industry is refinancing debt of those companies they bought during the boom. A large part is due to mature in 2012-14.

Connaughton said the HCA deal was done proactively to “chip away” at some of the upcoming debt maturities.

“We didn’t have to refinance anything at HCA, but we decided to do something because we wanted to chip away at some of those maturities coming out in that timeframe,” he said.

He doesn’t see a “big bang in 2011-12” when industry refinancings are due and said people will “try and chip away … so it won’t be a great looming number.”

UNLEVERED DEALS

Connaughton noted that with valuations of potential targets down so much from the boom time, deals can be done without so much leverage.

“You don’t need a normalized leveraged market to have … potentially a very interesting transaction,” he said. “Some of the deals we’re looking at right now, the values have corrected so significantly, we’re looking to potentially do unlevered transactions.”

The pace of private equity deals dropped off a cliff when the credit crisis hit and buyout firms have been doing smaller deals or investing in areas such as debt.
One potential opportunity for private equity is Treasury Secretary Timothy Geithner’s proposed plan for public-private partnerships to buy toxic assets — although financial markets are looking for more certainty about the proposal.

Connaughton said it was important for investors to know what the rules are before getting in.

“You have to find a way to create confidence that you don’t get in and then the rules change,” he said. He added that a lot of the asset opportunities there are real estate-related, which Bain hasn’t aggressively pursued.

“If there are plays that relate to leverage loans in operating companies, those are definitely more of our power alley,” he said. Bain has a credit affiliate, Sankaty Advisors, that invests in leveraged loans and high-yield bonds.

Commenting more broadly about the financial crisis, he expects private equity will participate more but wanted to understand the landscape first.

“People say, why hasn’t private equity come in sooner? The reality is, I think they will, but like everyone else, they want some stability, they don’t just want to throw money into something without understanding the landscape.”

In terms of other areas of interest for potential investment, he said that cyclical companies — which are more exposed to the economy’s ups and downs — were getting “very interesting to look at right now.”

(Reporting by Megan Davies; Additional reporting by Svea Herbst in Boston; Editing by Gary Hill)