Debt crisis jeopardises private equity deals

08 August 2007 17:24  [Source: ICIS news]

Debt crisis may halt M&As By Joseph Chang

NEW YORK (ICIS news)--The US debt market crisis will jeopardise chemical industry mergers and acquisitions (M&A) in the second half of 2007 and perhaps beyond, said one investment banker on Wednesday.

“The debt issuance crisis that developed in July will have a significant impact on all M&A activities in the second half of 2007, but in particular the activities of the private equity buyers,” said Peter Young, president of New York-based investment bank Young & Partners. “This will really stop the show - some deals may not go through and others won’t be announced.”

Private equity players had a strong first half of 2007, capturing 28% of the total number of deals and 36% of the dollar volume - up sharply from 15% and 17%, respectively in 2006, said the banker.

Private equity buyers accounted for five of the top 10 deals in the first half, he added.

This year “will prove to be a two-act play with dramatically different acts due to the severe debt and liquidity crisis”, said Young. “The debt crisis that started in the mortgage market has thrown a high degree of uncertainty around many of these deals. The biggest potential casualties are the private equity deals that depend heavily on debt financing and in particular, high yield public debt.”

For those leveraged deals that have already been announced, furious negotiations were taking place between investment banks and buyout firms as the banks try to convince buyers to walk away from their deals.

“Many investment banks are trying to get borrowers to cancel their deals and are offering to pay the borrowers’ break-up fees and expenses,” said Young. “But it is unlikely that the borrowers will agree to do this due to the damage to their reputations if they back out of a signed deal.”

With over $300bn (€219bn) of financing commitments backed by investment banks for deals in all industries in the face of a deteriorating credit market, the available financing capacity to support new debt financings has become severely impaired, according to Young & Partners.

($1 = €0.73)

Look for further analysis of the M&A market in the 20 August issue of ICIS Chemical Business

By: Joseph Chang
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