Sale of Home Depot unit hit by credit crisis

Home Depot, America's biggest DIY chain, has been forced to accept $2bn (£1bn) less from the sale of its wholesale distribution division, as the effects of the credit crisis continue to ripple through the financial system.

The sale to a private equity consortium was one of a string of major deals that were thrown into doubt when the credit markets seized up, leaving private equity groups unable to find the cheap finance they have used to fuel their buying spree of recent years.

And investors are still scouring the roster of upcoming mergers and acquisitions to see if other, even bigger, deals may be in jeopardy when bankers return from their summer holidays and test the credit markets one more time in September. It is still unclear whether central banks' efforts to pump liquidity into the system have been enough to restore the private equity industry to its previous levels of frenetic activity.

Home Depot has accepted a new $8.5bn price tag for its wholesale division, which supplies building contractors, homebuilders and other business customers. In June, it agreed to sell the business for $10.3bn to a consortium of Bain Capital, Carlyle and Clayton, Dubilier & Rice.

And it is understood to have agreed to other major concessions to save the deal. It will keep a 13 per cent stake in the business and will also underwrite $1bn of the debt.

The banks funding the acquisition - Merrill Lynch, JP Morgan Chase and Lehman Brothers - had threatened to walk away for fear of being unable to sell on the debt in the financial markets. That would have meant they had to keep the loans on their own books, something that would upset their investors and could lead to them sitting on large losses.

The banks which underwrite private equity deals have demanded much tougher terms in recent weeks, and have also been examining ways to get out of some of the $225bn of financing commitments they have already entered. Analysts say a key test of the credit markets will come next week, when the banks backing Kohlberg Kravis Roberts' $26bn acquisition of First Data, the credit card payment company, start trying to sell First Data debt in the credit markets.

Shares in the large Wall Street banks fell yesterday amid signs the credit crisis is far from over and after Goldman Sachs slashed its earnings forecast on Lehman Brothers, Bear Stearns and Morgan Stanley. Many banks are close to closing the books for the third quarter of their financial year, and speculation has turned to the size of any write-downs they may announce on loans and other credit products stuck on their books. Across the debt markets, the values of numerous kinds of derivative products have collapsed, particularly those where the underlying collateral is the mortgages of low-income Americans.

The credit crisis has its epicentre in the US housing market, where there was more miserable news yesterday. The amount of unsold homes on the market is up to its highest level since 1991 - now 9.6 months of supply, according to the National Association of Realtors. The number of home sales fell 0.2 per cent in July from an upwardly revised 5.76 million seasonally adjusted annual rate in June.

"This shows that the housing downturn continues to intensify," said Mark Zandi, chief economist at Moody's Economy.com in Pennsylvania.

This week, a key housing market indicator is forecast to show that the median US house price has fallen in value for the first time in more than 50 years. Repossessions are running at record levels.