The froth is gone from the credit markets. Fear is back, and it is threatening private equity returns. Lenders are feeling less exuberant, and that loss of exuberance is being reflected in loan pricing and structure. With Europe a question mark and the U.S. economic picture hardly inspiring, deal volume is slipping.
Henry Kravis, co-founder of KKR & Co., recently noted the rapid change in the credit markets by referencing his firm’s acquisition of Pfizer’s Capsugel unit. That deal, announced in April, would cost at least 200 bps more today, according to Kravis. Surprisingly, in referring to a deal announced in April Kravis actually understated the speed of the shift in market sentiment. As recently as July his firm was able to negotiate improved (to 6.88 per cent) pricing on the Capsugel deal.
Kravis’ numbers indicate that in today’s market annual interest and principal payments on the $920 million in debt for the Capsugel deal would be nearly $12.1 million greater than when the deal closed. Throw in tighter covenants, less leverage and a more opaque exit strategy and it is not hard to see why the private equity titan is bearish on the current environment.
About the author:
David Johnson is a partner with ACM Partners, a boutique financial advisory firm providing due diligence, performance improvement, restructuring and turnaround services to companies and municipalities. He can be reached at 312-505-7238 or at [email protected].
NOW WATCH: Money & Markets videos
Business Insider Emails & Alerts
Site highlights each day to your inbox.