Equity firms don't mind buyout busts

An unlikely group might be quietly hoping for more buyouts to go bust — the same private equity firms and investment banks that have been fueling much of the takeover activity.

That doesn't mean they are rooting for the death of dealmaking, because that would put them out of business.

But those orchestrating the deals certainly know that if some buyouts collapse or are delayed, as in the cases of Sallie Mae parent SLM Corp. and Acxiom Corp., it would reduce competition in the loan market to raise money to finance other takeovers still in the pipeline.

With nearly $300 billion in loans needing to be sold at a time when credit markets remain under stress, every bit of inventory taken out of the way could boost demand for their offerings.

That's an indication of what dealmakers are up against now that credit conditions have deteriorated since they brokered most of their buyouts. Just a few months ago, a record-setting pace of leveraged takeovers was fueled by easy access to cheap debt. Not only could money be borrowed at low interest rates, but there was little trouble unloading the debt to institutional investors.

Today's financial world is a whole lot different. The surge in defaults on home loans has cascaded into a wider worry about credit woes that largely paralyzed most debt dealings in recent months.

That's reflected in the 64 percent tumble in the leveraged loan market during the third quarter, to $68 billion from the all-time high of $187 billion during the previous three months. It was the largest quarter-over-quarter decline since Standard & Poor's Leveraged Commentary & Data Group began tracking that market a decade ago.

Given what is going on, some leveraged buyouts appear to be hitting a speed bump. Among those being called off include the takeovers of audio equipment maker Harman International Industries Inc. and data-management company Acxiom.

Wall Street banks and private equity firms are trying to get out of deals now. As a result, they are combing the fine print of their takeover agreements to seek points that could free them from their commitments.

For instance, a group of investors led by private equity firm J.C. Flowers & Co. has told Sallie Mae (SLM Corp.) it wants out of its $25 billion purchase of the student lender, saying the terms of the deal were no longer acceptable given the current economic environment and the fact that new legislation would cut about $20 billion in federal subsidies to companies like Sallie Mae.

Sallie Mae has vowed to pursue legal action against the move, but for now it looks like the deal is stalled. And that means $12.5 billion in debt inventory has been wiped off the calendar at least for now, creating a "tailwind" for the loan market, S&P said in a note to clients.

In fact, the collapse of the Sallie Mae deal and others recently could have helped fuel the bigger-than-expected loan sale tied to the buyout of First Data Corp. Just weeks ago there was concern that those underwriting the $26 billion takeover of the data processor wouldn't be able to attract enough investors to buy its debt.

Then buyout shop Kohlberg Kravis Roberts & Co. agreed to some changes to the loans, which sweetened the deal for investors by offering them more protections for their money. At the same time, some buyouts began to fall apart, which knocked down the supply of loans expected to hit the market in coming months.