CDS shows Lend Lease risks buyout, says Bloomberg

Lend Lease Buyout Risk Rises, Credit Defaults Swaps Show
By Laura Cochrane

July 17 (Bloomberg) -- Lend Lease Corp., Australia's biggest property developer, may be the target of a leveraged buyout, according to traders betting on the creditworthiness of companies.

Speculation that private equity firms are poised to bid has increased the risk of holding Lend Lease debt to the highest since August 2005. Credit-default swaps are financial instruments based on corporate bonds and loans used to speculate on a company's ability to repay debt.

Buyout firms could buy Lend Lease to break it up, selling businesses including Actus Lend Lease in the U.S. and Bluewater shopping centers in the U.K., said Brent Mitchell, an analyst at Shaw Stockbroking Ltd. A total of $76.7 billion of takeovers have been announced in Australia this year, up from $44.8 billion at the same time last year, according to data compiled by Bloomberg.

``If you took it over there are a couple of quick sales you could do to recoup a lot of what you paid for it,'' Melbourne- based Mitchell said. ``The Actus U.S. military housing business has been fairly successful with a 25 percent market share and they also have a number of high profile U.K. contracts.''

Credit-default swaps based on $10 million of Lend Lease bonds gained 20 percent in the past month to $61,000 at 2 p.m. in Sydney, Bloomberg data shows. This is the highest since Aug. 15, 2005. An increase in the five-year contracts indicates deteriorating credit quality.

Chief Executive Officer Greg Clarke told the Australian Financial Review that Lend Lease hasn't ``had an approach for years,'' the newspaper reported yesterday.

Lend Lease declined to comment today.

Leveraged Buyouts
Private-equity firms have flocked to Australia, which last year scrapped a 30 percent capital gains tax for overseas investors, with the total value of announced takeovers by such firms rising to $15.6 billion from $3.7 billion at the same time last year. Still, interest may wane because of rising borrowing costs after the value of U.S. subprime-mortgage debt plunged.

Pacific Equity Partners and Permira Holdings Ltd. quit a buyout group for Coles Group Ltd., Australia's second-largest retailer, last month and yesterday Kohlberg Kravis Roberts & Co. abandoned a planned debt sale for a Dutch retailer.

Lend Lease is ``under-geared,'' Mitchell said, so buyout firms wouldn't have to borrow as much to take over the company, reducing the chances that rising costs would deter firms from pursuing a deal.

Buyout firms use a combination of their own funds and debt to pay for acquisitions. They seek to expand companies or improve performance before typically selling them within five years to other funds or investors.

Bond Risk
Credit-default swaps were conceived to protect bondholders against default. They pay the buyer face value in exchange for the underlying securities should the company fail to adhere to its debt agreements.

Investors have increasingly turned to the derivatives as cheaper and easier investments than bonds, making the market one of the best gauges of changes in credit quality.

Leveraged buyouts are perceived as bad for bondholders because private-equity firms typically use the company they are acquiring to borrow the money needed to finance the deal.

Lend Lease's debt has the lowest investment-grade ranking of BBB- by Standard & Poor's and Baa3 by Moody's Investors Service. The company has A$1.4 billion ($1.2 billion) of bonds outstanding, Bloomberg data show.

Lend Lease has a market capitalization of A$7.4 billion. The shares fell 1 cent to A$18.54 at 3:35 p.m. in Sydney.