Sea of Change

A change in risk attitudes of investors away from massive debt funded leverage buyouts and IPOs has to happen sometime. Whether this marks the peak in debt funded insanity remains to be seen, but for now there can be no doubt that investor appetite for credit is starting to wane.

Cracks are starting to appear in the credit market, threatening to disrupt the flow of easy money that has fueled a record pace of leveraged buyouts. No wonder Blackstone Group LP is trading below last week's initial public offering price.

ServiceMaster Co., which owns pest-control and gardening companies, is the quarry in a $5.2 billion buyout by Clayton Dubilier & Rice Inc. The company failed to find buyers for $1.15 billion of a bond flavor called pay-in-kind toggle notes this week, intended to fund the takeover.

US Foodservice, a unit of Royal Ahold NV, the Dutch supermarket chain being bought by Clayton Dubilier and Kohlberg Kravis Roberts & Co., took three stabs at sweetening the terms of its planned $1.55 billion fund raising before junking the deal. Toggle notes again proved unpalatable to investors.

Also this week, KKR boosted the interest payable on a $2.43 billion loan funding its purchase of discount retailer Dollar General Corp., investors who may buy the debt told Bloomberg reporter Harris Rubinroit. Instead of as little as 2.5 percentage points more than money-market rates, the loan will pay a premium of 3 percentage points, boosting the potential quarterly interest payment to as high as 8.36 percent.

And Thomson Learning, a unit of Thomson Corp., scrapped the riskiest slice of a planned $2.14 billion bond sale last week. It boosted the interest it was willing to pay on its loans and cut the amount of debt offered to $1.6 billion to get the sale away.

Buyout firms have announced more than $530 billion of acquisitions this year, putting them on course to top last year's record $701.5 billion and maybe reach $1 trillion for 2007. Cheap finance from the debt market has nourished that growth.

It's interesting that two of the four deals above choked on toggle bonds. For more on toggle insanity please see Toggle Bonds - Yet Another High Wire Act.

Buyout Boom Speed Bump

The International Herald Tribune is reporting Buyout boom hits a speed bump.

The buyout boom may be about to hit a bump.

After years of supersize private equity deals, investors in the debt that supports these transactions - the lifeblood of the industry - have begun to not so quietly push back at several prominent transactions.

These setbacks come as Cerberus Capital Management begins a road show this week to sell bonds for its $7.4 billion buyout of Chrysler; it plans to raise up to $62 billion. First Data, which was acquired by Kohlberg Kravis Roberts for $29 billion, plans to price its bonds next month. And later this year, bonds for the buyout of TXU, the largest in history, will go on sale. TXU is likely to seek about $24 billion.

The resistance from bondholders may already be cooling the buyout market. The proverbial Merger Monday has not been so merger-filled lately. On Monday, only seven deals were announced, compared with 43 a week ago and 84 on June 4, according to data from Thomson Financial.

"In the last couple of days, we've seen some cracks," said Kingman Penniman, president of KDP Investment Advisors, a bond research firm. "Private equity people have for a long time now gotten funding at very low rates and very liberal terms. The market has known for a long time that this was ridiculous."

Not only bondholders but banks themselves appear to be thinking twice before they agree to lenient financing of these huge deals.

Debt Concerns Rise

Bloomberg is reporting Kia, MISC, KKR Cancel Bond Offerings on Debt Concerns.

Kia Motors Corp., South Korea's second-largest automaker, canceled a $500 million bond sale for this week as skittish investors cut demand for riskier assets.

At least seven companies from U.S. Foodservice in Columbia, Maryland, to steelmaker Arcelor Mittal in Rotterdam, Netherlands, pulled at least $2.2 billion of debt sales amid concern that losses from bonds backed by U.S. subprime mortgages will spread to other markets. Caliber Global Investment Ltd., a $908 million hedge fund, said today it will close after losses.

Bankers postponed $100 million of bonds from Banco Schahin SA in Sao Paulo, $200 million of notes from Catalyst Paper Corp. in Vancouver, and $750 million of bonds for MISC Bhd., the world's biggest owner of liquefied natural gas tankers, in Kuala Lumpur.

"This may mark a tipping point in the credit cycle," said Robert Appleby, who helps manage $2 billion at ADM Capital in Hong Kong. "If we see a shakeout, it will be a healthy one because it will prevent deals from being priced incorrectly."

Mergers and acquisitions are increasing at the slowest pace since January. Companies announced about $304 billion of takeovers this month, half the amount in April or May. Leveraged buyouts, where firms use mostly borrowed money to fund acquisitions, account for 21 percent of this year's mergers.

"For so long, investors have been making excuses to buy," said Appleby at ADM. "Now they are looking for reasons not to buy. Psychology does change on a dime."

I have talked about this many times. Yes, Psychology can change on a dime. What else do you call it when consumers are camping out overnight to buy Florida condos to a couple months later when there simply are no bids? Now we have gone from a situation where every conceivable deal, no matter how ludicrous managed to find funding, to a multitude of deals collapsing in a week.

It would be fitting if the Blackstone IPO established the high water mark for Ponzi funding, but that can only be determined in retrospect. Right now it is obvious that numerous parties are all desperately trying to prevent the shift in sentiment from spreading from consumers to Wall Street. Moody's, the S&P, and Fitch are in on it too as noted in The Rating Game Scam.

No this is not some giant conspiracy going on. Rather this is a bunch of corporations making billions in profits selling, underwriting, speculating on, and/or rating total garbage being sold to investors, hedge funds, pension plans, etc, and those making the billions do not want the party to end.

In Consumer Sentiment Wanes as Housing Slumps we discussed an enormous shift in consumer sentiment and noted that 7 in 10 Americans Say Economy Is 'Getting Worse'. And by now it should be obvious to even the casual observer that cracks in the dam are multiplying far faster than they can be patched. Nonetheless the charade continues. The Fed, Greenspan, Fannie Mae, Bear Stearns, and now Bitsberger, the treasurer at Freddie Mac is saying the Subprime Crisis is Contained.

David Lereah and the NAR did not want the housing bubble to pop either but now that it has popped they are desperately trying to turn sentiment around by calling this a "much needed correction". But it certainly hasn't helped homebuilders or the housing market any, has it?

Like housing before it, leveraged buyout activity and debt funded stock buybacks reached mania levels. When the tide of sentiment changes from mania back towards reality no power on earth can stop it. That spells bad news for an economy addicted to and dependent on ever increasing levels of debt and leverage.

Mike Shedlock / Mish
http://globaleconomicanalysis.blogspot.com/