Private equity held up by 'a year's worth of debt'

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The Independent Online

Major private equity buyouts have ground to a halt because of a backlog of "a year's worth" of debt financing that banks must sell to other investors before they can start funding new deals, industry sources said.

"There is a $100bn (49.7bn) pipeline of deals [in Europe] that needs to be sold... This represents a one-year supply of deals, some of which with the benefit of hindsight were done at the wrong price, the wrong structure, and the wrong covenants. They will have to be repriced," said Matthew Craston, joint head of leveraged loans at European Credit Management, a specialist asset manager.

Private equity firms drove record mergers and acquisitions activity over the last several years. Through the first half of this year, $1.9 trillion worth of deals were announced. But the meltdown in the credit markets has made it nearly impossible for banks to sell on the loans they put up to finance the takeover boom.

"Everything has absolutely hit the buffers," said one banker. "It's like a python that swallowed an elephant. There's serious indigestion."

A syndicate of lenders led by Deutsche Bank has been unable to get rid of any of the £9bn it put up to finance KKR's takeover of Alliance Boots, despite much of it being at a discount. Barclays and Mizuho, the lead banks on the £6.1 merger of the AA and Saga, have also been stuck with the loans from that deal.

In order to finding willing buyers for such loans, Mr Craston said that banks could be forced to strip out the most risky pieces of debt – and keep these on their balance sheets for a time – to sell the higher grade debt on to other institutions and hedge funds.