The debt casino is back

It was just about a year ago that the senior debt market started to find its feet, with 5x leverage being available for certain opportunities (see prior post “U.S. senior debt market creaks open” Feb 4-10). According to the Wall Street Journal, many of the bad habits of 2007 are now returning, and it should come as no surprise that the buyout kings at KKR are the ones to benefit on their US$5.3 billion LBO of Del Monte Foods:

Investor appetite was so strong for Del Monte that KKR increased the size of the loan this week. And KKR took advantage of the demand to remove many of the standard protections for loan holders, including requirements for financial tests that companies must meet.

“We continue to see the trend toward more borrower friendly terms and on occasion see some very uncommon terms,” said Michael Knox, founder of Xtract Research, a covenant-focused research firm.

The equity component in large buyouts has slipped back to 30% from 40%, and banks are syndicating large no-covenant loans to third party investor pools. How many of them care about the lack of covenants or “uncommon terms”? Few, one fears, since most of the new debt that’s being arranged isn’t staying on the balance sheets of the teams doing the arranging.

Exactly what we saw in the 2005-07 mortgage market.

Didn’t we just live this Horror Show (see prior post “The debt casino is open again” Oct 19-07)?

MRM