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CNBC's Faber: Danger Sign for Banks In Private-Equity Deals

One sign that the flurry of private-equity deals may have reached a top is the rapid growth of the so-called "equity bridge" in such transactions, CNBC’s David Faber reported.

An equity bridge is an investment in the transaction itself by the banks that are helping a company go private, Faber said.

For example, in the pending deal in which Thomas H. Lee and Bain are buying Clear Channel, the five banks financing the purchase also agreed to put up $1.5 billion of the $4 billion required to complete the deal, Faber said.

The payment could be thought of as enabling the banks to share in the hundreds of millions of dollars in fees that are generated by the financing they provide, Faber said. The fees go right to right to the bank’s bottom line.

The practice is becoming increasingly common, Faber added. In KKR’s last two deals, banks provided bridges totaled more than $6 billion.

He said seven banks have committed about $3.5 billion to take First Data private. The danger is that banks ignore the risk involved in such deals.

In 1989, Ohio Mattress went private in a deal financed by First Boston. When First Boston couldn’t place the long-term debt to fund the bridge of $475 million, it almost killed the firm.

The deal will be remembered as the “burning bed.” Faber warned that if one of the huge leveraged buyouts with a large equity bridge goes bad, "the whole house will be on fire."