Junk, leveraged loans face $312 billion overhang: $232 billion LBO commitments; $80 billion bridges

By Jennifer Lanning Drey

Portland, Ore., Aug. 23 - Following early August's turmoil in the marketplace, the high yield and leveraged loan markets face an overhang of $312 billion, according to figures calculated by Prospect News.

The investment banks are now collectively committed to providing $227 billion in loans backing leveraged buyouts.

Meanwhile, the banks hold another $73 billion in bridge loans intended to be replaced by bonds.

Additionally, the banks have nearly $7 billion of funded bridge loans on their books.

The numbers highlight the impact that the recent troubles that started in the subprime lending sector have had on the leveraged finance markets, bringing funding for LBOs to a halt, at least for now.

The Prospect News figures are based on the most recently announced terms for 60 leveraged buyouts, all but two of which are attached to loans that have not yet closed.

In cases where a total financing commitment has not yet been announced, the figures assume a rule-of-thumb two-thirds of the total value of the deal as the amount that will be funded through a bank loan or high-yield bonds.

The figures do not include an estimated commitment amount for Clear Channel Television Group, which announced in April that it has a commitment for new debt financing to help fund its buyout by Providence Equity Partners Inc., but did not provide details on the dollar amount or banks that may be attached to the deal.

Additionally, the figures do not account for Cerberus Capital Management LP's planned buyout of Option One Mortgage, as the transaction price will be based on the value of the tangible net assets of the business at the date of closing, according to an 8-K filing made with the Securities and Exchange Commission when the deal was announced in April.

The totals also assume that all the deals will go through as most recently announced, although some could be renegotiated or possibly abandoned. Home Depot, Inc. said "material changes" are possible in its agreement to sell its HD Supply business for $10.325 billion.

Classifying the deals

As detailed in the first section of the accompanying table, a majority of the loans are unfunded at this point and not syndicated, leaving investors to wonder whether they will happen, and creating the potential for significantly more funding to be forced into bridge loans or held on the arrangers' books until market conditions improve.

Another 10 loans, detailed in the mid-section of the table, have been funded but then chose to postpone syndication in the hopes that market conditions will be better for loan syndication in the future. In the meantime, the banks have funded bridge loans for some of the companies, including Alliant Insurance, Allison Transmission and DAE Holdings where accompanying bond deals could not be completed.

Finally, the last section of the table shows two more rare situations thus far, where companies Aeroflex Inc. and CEVA Group plc, managed to close their loans while their accompanying bond offerings were postponed after being announced to the market, leaving banks to fund $1.37 billion in bridge loans to the two companies.

The columns indicate the size of the commitment given by the banks - a figure that could include both loans and bonds - the amount of bonds if it has been broken out separately (and is therefore not included in the commitment figure) and the size of bridge or similar loans that have been specifically funded after a planned deal that was to have been sold more broadly in the markets was pulled.

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