The speed in which the heat has gone from the leverage finance market has left most participants reeling. Indeed, had IFR held this roundtable prior to the summer then the conclusions would have been very different.
Before the summer the position of the private equity industry looked unassailable. Dubbed the new masters of the universe, the industry’s ability to raise new debt meant that none but the largest of listed corporates were safe from PEs predatory advances. In the US buyouts in the tens-of-billions of dollars were agreed on a seemingly weekly basis, while in Europe the apogee of private equity confidence came with KKR's £11.1bn agreed buyout of Alliance Boots.
In retrospect the takeover of Alliance Boots now looks like the height of private equity folly rather than grandeur. The majority of the £9.02bn debt supporting the buyout is still sat on underwriters' balance sheets, despite efforts to remove it at significant discounts. And rather than buyouts in the billions, European transactions are now very much limited to the mid market.
So what went wrong? During the discussions, the participants all agreed that while events in the US sub-prime sector were the ultimate catalyst for the crash in confidence, there were signs over the past year that the market was becoming over heated. Structures had become overly aggressive and levered bank lenders had been withdrawing from the market for at least a year. Moreover, the unusual behavior of various leveraged loans in the secondary market offered early warning signs of the volatility to come.
What is certain that the new market conditions are here to stay for a good while yet. Arrangers are coming to terms with the fact that institutional liquidity has in the main part evaporated and buyouts must be structured to appeal to bank buyers. And with billions of euros of unsold debt stuck on balance sheets the ability of lenders to underwrite new debt is severely curtailed.
During the roundtable discussion all agreed that the fundamentals supporting the European leveraged market place meant that while the conditions may worsen before they get better, some form of normality should return at some point in 2008. However, what that normality will entail is still up for discussion.
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