Thursday, September 06, 2007

Further Details Home Depot Private Equity Deal

Business Week has a cover story Private Equity's White-Knuckle Deal about private equity in general and the Home Depot deal in special. I have filtered some of the Home Depot details but i suggest to read the entire story. This is some kind of follow up to the post Home Depot Hit As Credit Crunch Squeezes Deals

After hearing more of the details it wouldn´t surprise me if this deals will haunt Home Depot ......

Business Week hat eine Titelgeschichte zum Thema Private Equity Private Equity's White-Knuckle Deal und konzentriert sich hierbei besonders auf den modifizierten Deal von Home Depot. Der komplette Bericht ist lesenwert. Das gabze hier ist ne Art Vervollständigung zu meinem Post Home Depot Hit As Credit Crunch Squeezes Deals

Nachdem die letzten Details an Licht gekommen sind bin ich mir ziemlich sicher das dieser Deal und die Zusagen Home Depot noch jahrelang verfolgen und einholen wird.

After bashing the media almost every week i think it is appropriate to praise Business Week for warning about the risks associated with private equity in their cover story from October 2006 Gluttons At The Gate "A story of excess"

Nachdem ich ja beinahe wöchentlich auf die Medien für Ihre unterirdische Berichterstattung losgehe möchte ich diese Gelegenheit nutzen um ein ausdrückliches Lob an Business Week für Ihre Cover Story vom Oktober 2006 Gluttons At The Gate "A story of excess" die sich mit den Risiken von Private Equity auseinandersetzen.

After several more hours of furious bargaining, an accord was reached. The banks agreed to provide financing, including a reduced loan of $1 billion. Home Depot agreed to assume the loan payments if the firms were to default on it. And the buyout firms agreed to put more cash into the deal, pay the banks higher fees, and give Home Depot a 12.5% equity stake in HD Supply. The final price tag came to $8.5 billion.

The debt terms were revealing. BusinessWeek has learned that the package includes two loose types of funding that have flourished in recent years—exactly the kinds of loans and bonds that pundits had assumed were dead. The $1 billion loan was of a type called "covenant-lite," named for its easy repayment terms. And the deal included $1.3 billion in "payment-in-kind" (toggle)bonds, which allow the borrowers to pay off the debt with securities instead of cash.

Number Of The Day..... Toggle Bonds

Bonds that allow companies to pay interest in extra securities instead of cash, including toggle notes, accounted for almost 9 percent of high-yield debt sold this year, compared with less than 1 percent three
years ago

A retreat from loans with easy terms could put a damper on private equity dealmaking. Covenant-lite loans burst on the scene a few years ago and quickly gained favor among buyout firms looking for easy money. Traditional loans carry strict requirements that dictate when the borrowers have to repay them. Some stipulate that the borrower's profitability must improve every year; if it doesn't, the lender has the right to renegotiate the loan at a higher interest rate or demand repayment immediately. Covenant-lite loans, by contrast, come with relatively few stipulations. Payment-in-kind bonds are just as loose, allowing borrowers to pay off the debt by issuing more securities. Such freewheeling terms are advantageous for borrowers but risky for the people holding the debt.

Investors threw caution to the winds until the credit crunch began, and the market for risky securities vanished overnight. The $8.3 billion in covenant-lite loans made in June shriveled to zero in August, according to Standard & Poor's Leveraged Commentary & Data (MHP ).

Number Of The Day.....Covenant Lite Loans

In 2004, there were just $100 million of such loans. But the total rose to $2.4 billion in 2005, $23.6 billion last year and $103.9 billion in the first half of this year.

He also agreed that Home Depot would guarantee a $2 billion covenant-lite loan for the buyers. The lower deal price certainly appealed to the buyout firms. The discussions were "all remarkably free of acrimony," says someone close to the deal.

Private equity firms have already embraced debt to a seemingly dangerous degree. On average they're paying 14.7 times the target companies' operating earnings, up from 3.8 in 2002, estimates Thomson Financial

> And this at times when earnings are at peak margins and not so depressed like in 2002 and a US recession in the cards..... Get ready to hire the distressed debt manager and float some funds in this segement....I´m just daydreaming how it will be if the distressed fund from Blackstone wants to buy some of the the Blackstone assets that are in trouble......

> Und das zu Zeiten wenn die Gewinnmargen bereits historicche Hochs erreichen und es nicht wie in 2002 noch gewaltige STeigerungsmöglichkeiten gibt. Dazu kommt noch das die US Wirtschaft fast zu 100% in die Rezession abgleiten wird bzw schon geglitten ist. ..... Höchste Zeit Manager die sich in notleidenden Krediten auskennen anzuheueren und neue Fonds für diese Kategorie aufzulegen..... Stelle mir gerade vor wie es wäre wenn der Fonds für notleidende Kredite von z.B. Blackstone Vermögenswerte von einem Blackstone Buyout Fonds kaufen möchte.....
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Anonymous Anonymous said...

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2:15 AM  

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