Tough times ahead for LBO Loan Syndication

Deutsche Bank, JPMorgan Cancel KKR Boots Loans Again (Update1)
By Cecile Gutscher and Edward Evans

Aug. 3 (Bloomberg) -- Deutsche Bank AG, JPMorgan Chase & Co. and UniCredit SpA canceled the sale of 1 billion pounds ($2 billion) of loans for Alliance Boots Plc after failing to find investors, two people with direct knowledge of the deal said.

The underwriters withdrew the offer of second-lien loans, debt that ranks after senior loans for repayment, said the people, who declined to be identified because the discussions are private. Kohlberg Kravis Roberts & Co.'s bankers, which last month pulled 5 billion pounds of senior loans, will only syndicate 750 million pounds of mezzanine debt that ranks last for repayment and pays the highest interest.

Boots is the biggest example of the global credit crunch that has brought leveraged buyouts to a standstill and left Wall Street's underwriters with $400 billion of debt they can't sell, according to data compiled by Baring Asset Management. The aborted second-lien loans increase the Boots debt that New York- based KKR's underwriters have been left holding to $16.8 billion.

``Conditions in credit markets may become even tougher,'' said Toby Nangle, who helps manages $37 billion of assets at Baring in London and is avoiding high-yield debt. ``Many financiers are unwilling to stretch themselves further.''

KKR in New York and Italian billionaire Stefano Pessina agreed to buy Nottingham, England-based pharmacy chain Boots in April in Europe's biggest leveraged buyout.

The banks sought to reduce the amount they lent by syndicating debt to a wider group of banks and money managers.
`Cash-Generating Machine'

``We don't have any doubt on the credit risk'' because Boots ``is a cash-generating machine,'' UniCredit Chief Executive Officer Alessandro Profumo said on a conference call with analysts earlier today. The Milan-based bank said it owns 2.3 billion euros of Boots debt.

Deutsche Bank spokeswoman Oonagh Baerveldt and JPMorgan Stefania Signorelli, both in London, declined to comment.

KKR's banks, which also include Barclays Capital, Citigroup Inc. and Royal Bank of Scotland Group Plc, failed to attract investors to the Boots financing even after discounting the price of the second-lien loans to 96 percent of face value by reducing their own underwriting fees. KKR had increased the interest margin offered to 4.25 percentage points over benchmark the London interbank offered rates, 25 basis points more than initially proposed priced.

``We are unaffected by these issues,'' KKR spokesman Richard Constant in London said in an interview, declining to comment on the status of the loan syndication. ``Our financial position is strong and this doesn't affect our debt obligations.''

Chrysler, Gazprom
Losses from the highest U.S. mortgage defaults in a decade caused the collapse of two Bear Stearns Cos. hedge funds in June and investors to shun all but the safest assets. Companies scrapped bonds and loans totaling at least $53 billion in the past six weeks, according to Baring.

Concerns escalated last week when banks led by Goldman Sachs Group Inc., Citigroup, JPMorgan and Bear Stearns were unable to syndicate $10 billion of loans funding New York-based Cerberus Capital Management's acquisition of automaker Chrysler from DaimlerChrysler AG in Stuttgart, Germany.

OAO Gazprom, Russia's natural-gas monopoly, postponed a planned sale of bonds, Fitch Ratings said today.