Bank of America's CEO Expects Easy Financing for LBOs to Last
Here’s a great story from Bloomberg that needs absolutely no introduction (and may happily undermine an earlier post “Maybe there is a credit bubble after all” June 1-07, inasmuch as whatever credit bubble exists…it isn’t going to burst any year soon):
“Bank of America’s Lewis Expects Easy Financing for LBOs to Last
By Will Edwards
June 20 (Bloomberg) — Bank of America Corp. Chief Executive Officer Kenneth Lewis said private-equity firms will enjoy “unprecedented” access to financing for at least a few more years before a deal “goes bad.”
Lewis, who last month called for “sanity”‘ in the corporate-loan market, said the shakeout may not occur until the next decade. Leveraged-buyout funds have raised more than $250 billion for acquisitions since the start of 2006 and announced more than $1 trillion of takeovers. Barring some kind of shock to the markets, the easy money probably will continue, said Lewis, who runs the second-biggest U.S. bank.
“You’ll have a percentage of these deals going bad because they’re just levered too much,” the 60-year-old CEO said in an interview yesterday in New York. “I think it’s several years off.”
Dallas-based power producer TXU Corp. and First Data Corp., the world’s biggest processor of credit card payments, are among the companies seeking almost $200 billion of loans in the next year to finance LBOs. Some traders and regulators are concerned that looser lending standards may lead to an increase in defaults.
Bond yields climbed worldwide in the past month on concern inflation will pick up, prompting former Federal Reserve Chairman Alan Greenspan to say the increase in long-term interest rates may bring an end to the global boom in easy-access financing.
“It’s liquidity that’s driving the world,” Greenspan said on June 13 to a conference in Mexico City. “It will continue to be strong as long as real long-term interest rates stay low. This is not a permanent feature. It’s an intermediate-term period in world economic history that has never occurred before.”
“Very Thin” Deals
Bank of America, based in Charlotte, North Carolina, is beginning to turn down more private-equity deals because “they’ve gotten very thin” on pricing and they failed to contain the clauses that would safeguard lenders against defaults by companies purchased in leveraged buyouts, Lewis said.
“We at least for one, and I’m sure there are other banks, are starting to say ‘no’ more than we were before,” Lewis said. “And it’s not because we’re out of money.”
Even so, Lewis said every private-equity firm he has talked to is raising another fund. Should a deal fall apart, it would take time to slow investors’ appetite for the returns leveraged buyouts can yield, he said.
“You’ve got unprecedented liquidity,” Lewis said. “I’ve never seen anything like this.”
LBO firms use a mix of cash from investors plus their own funds and debt secured on the target they buy to finance deals. They typically seek to expand companies or improve performance before selling them within five years to other funds or investors in initial public offerings.
Bank of America last year retained its title as the second- biggest underwriter for syndicated loans, helped by its role as lead arranger for financing in the buyout of hospital operator HCA Inc., the biggest such deal at the time.
The bank also has provided so-called equity bridges to help buyout firms purchase companies. In a bridge, banks buy equity in the target company, reducing the amount of money required from the private-equity firm. A bank typically sells its stake after the deal is completed, often to limited partners such as pension funds or university endowments.
Lewis said he had confidence in the ability of executives at Bank of America to be able to distribute, or find a buyer, for those stakes.
Bernanke Sees Risks
Fed Chairman Ben S. Bernanke said last month that private- equity financing carries “significant risks” for banks and the central bank is reviewing the issue.
“I urge banks to closely evaluate the risks that they’re taking, not only in a context of a highly liquid, benign financial environment, but in one that would conceivably be less liquid and less benign,” Bernanke said in a speech in Chicago.
Traders who bet on the ability of companies to repay their bank loans have been speculating that the record pace of borrowing to fund LBOs will increase the risk of default.
The LCDX index of credit-default swaps, tied to the loans of 100 companies with below-investment grade ratings, fell 0.3 to 99.74 yesterday, according to broker Phoenix Partners Group in New York, and traded below 100 for the first time since being created May 22. A decrease in the index signals deterioration in the perception of creditworthiness.
Meantime, Lewis doesn’t expect the cost of borrowing for highly leveraged companies to change.
“You can have narrow spreads for a long time with this kind of liquidity,” he said.”
Amen, say our friends in private equity.