KKR Irks Wall Street With Tough Stance on Buyout Debt
Kohlberg Kravis Roberts, the legendary leveraged buyout firm known for its tough deal tactics, is living up to its image, to the growing frustration of Wall Street.
KKR, with four major buyout deals in the debt pipeline, is refusing to budge on lending terms agreed to with investment banks, even as debt investors show a weakening appetite.
That tough stance amid shaky debt markets means banks will have to shoulder all the risk and perhaps take significant losses on the massive loans.
With other private equity shops willing to renegotiate with banks, KKR's position is starting to fuel ill-will with Wall Street, sources close to the firm say.
Bitter bankers are hardly what KKR wants in the days before its planned initial public offering.
Of course, if the LBO climate steadies or returns to being robust, then any bad feelings will quickly be forgotten.
But should the debt markets continue to decline, some on Wall Street think KKR's hard ball tactics could come back to bite them.
"If they keep giving it to investment banks, nobody's going to want to write a commitment letter," said one banker, who did not want to be named.
KKR's belief is that the banks agreed to loan them the money, end of story, said the sources; if the banks have trouble syndicating the debt, too bad.
KKR declined to comment.
What makes KKR's situation especially sensitive, however, is the volume of deals it has in the funding pipeline. Year-to-date, KKR has announced more buyouts than any other firm: 11 deals worth $121.1 billion, according to Dealogic.
That volume has created a bottleneck of KKR deals needing debt investors, at a tough time for LBO financing. That, in turn, has left Citigroup and other Wall Street giants currently holding a pile of KKR-related paper, sources say.
KKR's IPO prospectus hasn't helped relations with banks any, as the document makes clear that its building a capital markets group to take banks out of the leveraged buyout process as much as possible.
The firm has told the eight investment banks financing the $26 billion buyout of transaction processing company First Data that it will not accept weaker terms, sources say.
Sources say KKR also insisted on keeping the financing of its buyout of U.S. Foodservice a covenant-lite agreement, or one that lacks traditional restrictions on borrowers.
Wall Street lenders on that deal had to pull a $2 billion loan from the market due to weak demand. KKR joined with fellow private equity firm Clayton Dubilier & Rice in May to buy the food distributor from Dutch supermarket chair Ahold.
Bankers hope that KKR will take the same approach Apax Partners took with the money it borrowed for the $7.75 billion purchase of Thomson Learning, Thomson's text book publishing group.
Apax agreed to adjust its financing terms by adding covenants, or borrowing restrictions, that took some of the heat off the banks when debt investors showed concerns about the loose lending terms and high leverage levels.
KKR appears to be unwilling to make such concessions.
Whether this will have long lasting effects on KKR's relationships "comes down to how much pain The Street takes," said one investment banker involved with several KKR deals.