The lending squeeze begins

I wrote recently about how the a squeeze in debt markets could have profound effects on the leverage world of private equity. Well, The Times carried a story yesterday about the proposed EMI takeover launched by Terra Firma. They suggested that Citibank, the principle bank lender may be withholding support from extending the offer deadline to shareholders, only 26% of which have assented to the deal.

This deal is not alone, with the Boots financing deal also being reportedly renegotiated.

The sheer backlog of deals underwritten and waiting to be syndicated — about $250 billion (£121 billion) in America alone — has prompted several banks, including Citigroup, JPMorgan and Deutsche Bank to refuse to lend any more money to private equity until they have cleared their books of previous financing commitments.

Leaving aside the impact on EMI of yet another failure to secure a buyer, and the embarassment to Terra Firma, this backlog will have a material impact on the market. Notably, deals will become more expensive rendering some “marginal” ones unattractive. It will also introduce caution amongst sellers about whether buyers actually have the means to finance the deal. It also indicates that investors to whom banks sell on the debt are becoming more cautious with knock on effects for liquidity.

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