In public, the banks financing the BCE buyout are saying all the right things.
Just last month, Toronto-Dominion Bank CEO Ed Clark said if he were again asked to support the $35-billion (Canadian) takeover, he would do so in a “heartbeat.”
Behind the scenes, lenders must have serious second thoughts about following through on this deal. Along with TD, Citigroup, Deutsche Bank and Royal Bank of Scotland are major supportors of the Ontario Teachers Pension Plan buyout at BCE.
While the final terms of the BCE loans have not been set - the transaction isn’t expected to close until April - it’s becoming increasingly obvious that what worked when the deal was struck in late June isn’t going to fly today.
Banks go into these leveraged buyouts intending to sell off, or syndicate, enormous portions of the loans they make. This is normally a straightforward process. Since the credit crunch hit, debt syndication has become anything but straightforward.
Monday saw a $14-billion (U.S.) loan package meant to finance the $30-billion purchase of Harrah’s Entertainment go off the rails, with banks that made the initial loans finding few buyers when they tried to syndicate. One bank lending to Harrah’s, Credit Suisse, broke ranks by selling off $1-billion of the casino company’s debt ahead of schedule, a move that the Financial Times reported infuriated the rest of the lenders, and left the leverage loan market in disarray.
This week also saw banks force the private equity buyers of Intelsat, the world’s biggest satellite operator, to rework the terms of the loans financing the $16.5-billion purchase.
Given the problems with the Harrah’s and Intelsat deals, the Financial Times wrote Monday that banks “ now face larger potential losses on other big buyouts, such as BCE and Clear Channel Communications, and will be more desperate to get out of the financing commitments on those deals.”
Unless debt markets stage an incredible comeback over the next two months, the BCE loan package is in trouble.
Ontario Teachers can hold its bankers’ feet to the fire, and insist they honour the original terms of the loan. Doing so would mean the banks take a major hit, as leveraged buyout loans made last summer at 100 cents on the dollar now change hands in the secondary market at 90 cents on the dollar.
Or Teachers and its allies - Providence Equity Partners and Madison Dearborn Partners - can give the banks better terms by putting in more equity themselves. That changes the economics of this deal for the worse.
Either way, someone takes a haircut when this deal closes. The question is how that pain gets shared between lenders and private equity funds.
Or, as the continued weakness in BCE’s share price suggests, this whole deal may yet fall apart. Some combination of banks and private equity funds paying a $1-billion break fee to simply walk away. No matter what Mr. Clark says, a great many investors think BCE’s lenders would abandon this buyout in a heartbeat.