Tuesday, February 01, 2011

Rising Rates Fuel Boomlet in Buyouts

A flood of cash by investors seeking to profit from rising interest rates is having an unintended effect in the deal world, where this money is being recycled into corporate buyouts.
Investors have been selling bonds, which typically lose money when interest rates increase, and putting their cash in funds that invest in bank loans that finance corporate buyouts. The loans have floating rates, so the interest they pay investors rises as rates go up.
Individuals and institutions pumped about $6 billion into these funds in the fourth quarter of last year, almost doubling the previous quarterly record set in 2004, according to Lipper Inc. The pace accelerated this year, with investors pouring in about $3.4 billion as talk of inflation pushes rates higher.
That inflow helped fuel $7.9 billion worth of new leveraged buyout loans January, the biggest month since January 2008 when volume hit $11.3 billion, according to Standard & Poor's LCD.
Among the deals funded by this wave of investor money is KKR & Co.'s $5.3 billion deal for Del Monte Foods Co., the biggest buyout since 2008, and Carlyle Group's $3.9 billion deal for CommScope Inc. Leveraged buyouts are typically funded by a small portion of equity from the buyout firm, and a bigger slice of loans and bonds.
TPG Capital LP and Leonard Green & Partners also are prepping large loans for their $3 billion purchase of clothing retailer J. Crew Group Inc. A group of bidders led by Apollo Global Management LLC recently offered about $12 billion for Sara Lee Corp., which would have required close to $8 billion of financing had it been accepted.
Increased investor interest "absolutely means we're much more confident competing in sale processes," said Adam Blumenthal, co-founder of private-equity firm Blue Wolf Capital, which specializes in transactions for smaller companies. "Sellers are confident that if we come in and say there will be a financing package on the table, it will be there."

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