KKR's Banks Fail to Sell $10 Billion of Boots Loans

Date: Wednesday, July 25, 2007
Author: Cecile Gutscher and Edward Evans, Bloomberg.com

(Bloomberg) -- Deutsche Bank AG, JPMorgan Chase & Co. and six more banks are stuck with 5 billion pounds ($10 billion) of loans for Kohlberg Kravis Roberts & Co.'s purchase of Alliance Boots Plc.

The banks will keep the senior loans after failing to find investors to buy them, said four people with direct knowledge of the deal, who declined to be identified because the information is private. The banks will sell 1.75 billion pounds of junior ranking loans, after increasing the interest rate and using their underwriting fees to discount the price by as much as 5 percent.

Wall Street firms, which had no trouble raising money for leveraged buyouts for the past five years, are unable to find buyers at prices acceptable to clients such as Henry Kravis, the co-founder of New York-based KKR. At least 35 companies' borrowing plans were disrupted in the past five weeks, including the $12 billion of loans for Chrysler to finance its takeover by Cerberus Capital Management abandoned by bankers today.

``If you're a bank, it's a case of once bitten, twice shy,'' said Willem Sels, head of credit strategy at Dresdner Kleinwort in London. ``The banks won't push so hard for LBOs now. The leveraged loan market will have difficulty recovering.''

Nick Jansa, a director of capital markets at Deutsche Bank in London, and Kristian Orssten, head of European loans at JPMorgan, declined to comment. KKR spokesman Richard Constant also declined to comment.

Higher Interest

KKR and Stefano Pessina agreed to buy Nottingham, England- based pharmacy chain Boots in April in Europe's biggest-ever LBO. The firm and its underwriters last week extended the period for investors to participate in the deal, and held out the possibility of better terms.

The banks will sell 1 billion pounds of so-called second- lien loans, which rank after senior debt for payment, bankers involved in the deal said. Investors are being offered interest at 425 basis points over the benchmark London interbank offered rate, up from 400 basis points three weeks ago. The banks will sell the debt at 96 percent of face value.

The underwriters also plan to sell 750 million pounds of mezzanine debt, loans that rank lower than second-lien, increasing interest to 650 basis points over Libor, from 600 basis points, or 6 percentage points, proposed three weeks ago, the bankers said. The mezzanine debt will be offered at 95 percent of face value.

The discounts will come out of the 2 percent fees charged by the banks to underwrite the loans, or 180 million pounds on the 9 billion-pound financing. Bankers would wind up slicing 77.5 million pounds from their fees, based on the discounts offered.

More Concessions

KKR, Blackstone Group LP and other private equity firms will need to make further concessions to borrow the $300 billion Bear Stearns Cos. says they need to pay for buyouts already agreed.

``It's certainly a bad signal to the market,'' said David Watts, a strategist in London at research firm CreditSights Inc. ``It not only makes private equity more reluctant to do deals but also the banks. Banks don't want to be stuck with the bridge loans. You're not going to want to stick your neck out.''

Credit-default swaps on Boots debt jumped to a record. The contracts, used to bet on the ability of the company to repay debt, rose 25 basis points to 450 basis points, according to Citigroup Inc. The contracts traded at 27 basis points before KKR announced its bid. An increase indicates worsening perceptions of credit quality.

Europe's benchmark iTraxx Crossover Index of credit-default swaps on 50 companies has soared from 180 basis points to 361 basis points since the start of June, Bloomberg data show. The CDX North America Investment Grade Index rose 0.25 basis points to 55.25 basis points today, according to Deutsche Bank AG, the highest in more than two years.

Three-month pound Libor, an average of rates set daily by banks and used as a borrowing benchmark, is 6.05 percent.

To contact the reporters on this story: Cecile Gutscher in London at cgutscher@bloomberg.net ; Edward Evans in London on eevans3@bloomberg.net .