A glint of recovery in leveraged buyout world

Deutsche Bank and JPMorgan Chase have found buyers for the highest-yielding loans that financed Kohlberg Kravis Roberts s 11.1 billion purchase of Alliance Boots, the British pharmacy chain, in a sign that demand for credit may be improving after the recent trough.

The banks are now near completing the syndication of 750 million of mezzanine debt that ranks last for repayment, said two bankers involved in the sale. Such debt typically pays the highest rates because of the increased credit risk in the event of default.

Last month KKR s eight underwriters abandoned selling 6 billion, or $12 billion, of mostly senior loans, and have been saddled with the debt for financing the Boots deal, which is the biggest leveraged buyout ever in Europe.

If the underwriters complete this portion of the financing it would bode well for other leveraged deals.

Banks in the United States are attempting to raise $16 billion of loans for another KKR acquisition, of First Data. It would be the biggest debt sale since rising U.S. mortgage defaults led to the highest borrowing costs for buyout firms in four years.

The market for leveraged loans isn t dead," said Geraud Charpin, a strategist at UBS in London. "It s extremely difficult though. Investors know they can bargain with the banks who have underwritten these deals because the pipeline is huge."

The mezzanine debt pays annual interest at 6.5 percentage points over the London interbank offered rate. That compares with a 2.75 percentage point margin offered on the senior Boots loans in July. The large difference underscores how much more the banks had to offer to find buyers.

Banks have committed $350 billion for leveraged buyouts in the United States and 60 billion, or $83 billion, in Europe that have yet to be syndicated, according to UBS estimates. Underwriters agree to provide the financing to private equity firms when the acquisitions are announced. If market conditions sour, banks are forced to hold on to debt they cannot sell.

In another spark of good news for the leveraged buyout business, a group of banks led by Citigroup sold $1 billion worth of loans for Allison Transmission, an auto parts supplier owned by the Carlyle Group and Onex, The Wall Street Journal reported Thursday. The banks priced the debt at a 4 percent discount to face value and are still holding $3.2 billion of bonds and loans they had planned to sell in July.

KKR and Stefano Pessina, the Italian billionaire, agreed to buy Boots, a pharmacy chain based in Nottingham, England, in April.

Investors have agreed to buy the mezzanine loans for the Boots deal at 95 percent of face value, said the bankers, who declined to be identified because the discussions are private.

A spokesman for Boots, Richard Constant, and a Deutsche Bank spokesman, Richard Thomson, declined to comment. A spokesman for JPMorgan Chase, Michael Golden, was not available for comment.

Deutsche Bank, JPMorgan and UniCredit are leading the banks that are arranging the financing.

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