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Wednesday, July 11, 2007

LBO Credit Quality Falls

" Investor confidence in the ability of companies to repay debt used to finance leveraged buyouts fell to the lowest in at least nine months in Europe as lenders shun risky assets. "

The easy and cheap money that was financing this LBO mania is in the process of drying up and getting expensive.

" The U.S. subprime mortgage rout is spreading across debt markets worldwide, with investors demanding higher interest margins and tougher safeguards, or covenants, on loans to buyout firms. New York-based Kohlberg Kravis Roberts & Co. offered lenders a discount and added restrictions on its debt to raise $1.4 billion for Dutch DIY retailer Maxeda BV last week. "

This will ultimately pull the LBO 'bid' from the market that has kept each correction shallow over the last year.

" Private-equity firms need to sell $300 billion of bonds and loans to finance LBOs, according to Bear Stearns Cos. in New York. More than a dozen companies were forced to postpone or restructure debt sales in the past three weeks.

U.S. high-yield loan prices fell to a four-year low yesterday, with covenant-lite loans losing the most, according to Standard & Poor's LCD unit. "

A cancellation of one of the big pending LBO's might be a catalyst for a significant equity markets correction.

Source: LBO Credit Quality at Nine-Month Low, Loan Derivatives Show (