PE deals indicate lending thaw

October 8, 2009

NORWAY/Two very different deals announced Wednesday show that financing markets are starting to support larger private equity transactions again.

Still, large numbers of banks were involved in each deal and both involved a significant amount of the private equity firms’ own equity.

“It suggests there’s a little bit of thawing,” said Steven Kaplan, a professor of finance at the University of Chicago. “It suggests there will be a normal world at some point and they are both the kind of deals you’d expect to see in this environment — you don’t expect public-to-publics in this market.”

Blackstone’s acquisition of AB InBev’s theme parks involves up to $1 billion of equity in the deal, which is around 40 percent of the overall price. The rest is coming from senior secured debt, mezzanine financing and an undrawn revolver. Senior credit facilities are being provided by a line of banks — BofA Merrill Lynch, Barclays Capital, Deutsche Bank Securities, Goldman Sachs Loan Partners and Mizuho Corporate Bank.

Clayton Dubilier & Rice Inc’s $477 million deal to take a stake in cleaning company JohnsonDiversey and undertake a $2.6 billion recapitalization was backed by an even┬álonger list of banks: eleven in total are willing to participate in the financing, CD&R said.

The large number of banks involved “indicates that the lending market is still not robust so you need a bunch of lenders to get one of this size,” said Kaplan. Lenders will prefer to be diversified, he added.

Equity levels in deals are also higher than during the boom years. The equity check put in by Blackstone for the theme park deal is higher than what firms might have put in during 2005-07. During those frothy years, a more usual number was around 30 percent, whereas this year, some deals by private equity firms have even involved 100 percent equity.

“Equity percentages when the debt market is strong tend to be in the 30 percent range — or 25 percent if it is really high — and when the bank markets are off, which they are now… you’re at 35 or 40 percent, which is where you are today,” said Kaplan.

Still, there’s a long way to go between here and the late 1980s buyout wave.

“The big difference between the late ’80s and the recent wave is that (then), the median deal was 90 percent debt and 10 percent equity — it was insane,” said Kaplan. “The deals done in this last wave were much safer.”

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