CNBC's Faber: Credit Worries May Delay Some Big Buyouts
Growing concerns about credit quality are likely to delay some big leveraged buyouts over the next few months, CNBC's David Faber reported.
“It doesn’t mean that any of the announced deals are not going to close, but they may ultimately cost more,” Faber said.
He said Kohlberg Kravis Roberts is attempting to place high-yield bonds as part of the financing to take Dollar General private. Faber said it’s unclear how much more KKR will have to pay to complete the deal.
Dollar General was forced to restructure debt sales Wednesday as increasing risk made investors reluctant to jump into leveraged buyout financings.
“There’s no shortage of worries,” Faber said. “Whether or not there should be a lot of worry, that’s certainly a question for investors to consider.”
Faber said the number LBOs completed may decline in July and August, but he looks for the deal flow to return to normal this fall.
Several market analysts agreed that the buyout boom may slow for now.
“I think a lot of people are concerned about what’s going on in the fixed income market, and particularly the corporate bond market in the wake of the Bear Stearns news from a couple of days ago,” Steve Massocca, co-chief executive officer at Pacific Growth Equities, told CNBC’s “Squawk Box” Thursday. “People are concerned that we might be running into some problems with financing buyouts. I don’t think there’s anything terrible happening right now, but people are concerned and that’s given buyers pause. I think we’re sort of waiting to see how that issue plays out.”
Higher debt cost could threaten strong buyout activity that’s boosted stocks for the last few years. Catalyst Paper dropped a $200 million junk bond offering. Magnum Coal postponed a $350 million junk bond offering.
“It’s a shift from a seller’s to a buyer’s market, in terms of debt,” Doug Roberts, chief investment strategist at Channel Capital Research told CNBC’s “Morning Call” Thursday. “Some of the terms are being reset. U.S. Foodservice just happened to catch that reset in the middle of the transaction. This is just a temporary hic-up. I think the terms will change. It’s going to be a much tighter market, but essentially continuous activity.”
He said the type of deal may shift to larger companies with better cash flow from smaller, more speculative companies.
Some deals included new types of structures such as payment-in-kind bonds that allow issuers to either make payment in cash or by issuing more debt. The market may be looking for less leverage in the deals or wider spreads.