The Dow is plunging, credit is crunching and new high-yield issues are looking less likely than a victory in Iraq. If only there was a way to pin it all on Blackstone…
But here’s the thing: This isn’t yet the perfect storm that could destroy the buyout rush. All of the above are certainly elements, but we’re still missing a couple of high-profile PE-backed company collapses. I’m not saying that they aren’t coming – particularly given the sudden yield hikes – but buyouts keep coming until they do. And, to be specific, these companies need to collapse under the weight of their own debt, or for some other reason specifically related to financing structure. Another Atkins or Refco won’t matter.
I know that this sounds like I’m whistling past the graveyard, so let me explain my reasoning. First, I don’t believe that most pending deals are going to fail. That includes First Data, TXU, Alliance Data and all of the other companies whose stocks are currently being battered by pessimists (although they probably call themselves realists). Why? Because the participating banks have already put too much skin in the game to pull out now. Not just their money (think breakup fees & legal fees), but also their reputations.
The issue, therefore, is future deals. Conventional wisdom is to expect a severe slowdown, because of the aforementioned absence of high-yield debt. And there are a handful of deals LBO firms could do in March that they can’t do today (particularly mega-market deals). But they can do most of them, so long as they are willing to accept less favorable terms – and buyout firms have proven quite apt at backing down from such challenges. Remember Clear Channel and all those other deals where public shareholders kept demanding higher prices? Well, now it’s the lenders’ turn.
Most buyout firms already have warned their limited partners to expect lower returns than have been produced over the past few years, so there already is some built-in price flexibility. Moreover, it cannot be overlooked that the stock market is tanking. In other words, companies are becoming cheaper to buy – and buyout firms might be able to offset pricier debt with cheaper equity (particularly given that there is no shortage of fund capital).
To be clear, the buyout market is facing challenges that it has happily avoided for the past several years. But it really isn’t a crisis yet, no matter how much it might look like one.