Global private equity giant KKR has warned that the continuing credit crunch may lead to higher costs and reduced returns for its leveraged buy-outs.
KKR, best known in the UK for its £11.1bn acquisition of pharmacy retailer Alliance Boots, is concerned that its declining ability to issue high-yield debt via the capital markets will have significant impacts on its business. The comments, made in a regulatory filing ahead of its impending stock market flotation in New York, have implications for the entire private equity industry, which has prospered on the availability of cheap debt and willing bankers.
In its latest document, KKR clearly comments on the situation, over which it admits it has little control.
The cost of financing leveraged buy-out transactions by issuing high-yield debt securities in the public capital markets has increased significantly.
"If conditions in the debt markets do not become more favourable to us in the near term, we may need to rely on financing commitments provided directly by investment banks or other sources in order to consummate pending transactions or finance future transactions."
The filing admits that such financing may lead to higher costs and more restrictive terms than the private equity house had previously been able to take advantage of.
In the last four weeks, a number of private equity transactions have seen banking terms tightened to securitise, or sell on, the debt.
KKR has experienced this at first hand, with the raft of banks involved in syndicating the £9bn debt pile being used to part-fund the Alliance Boots deal due in part to weak banking covenants. The private equity firm also said that were the recent market blip to become a prolonged downturn, its business could be hit in other ways, with profits affected by fixed costs and the fact that it may not be able to scale back other costs quickly enough.
The warnings come as KKR attempts to convince investors to plough $1.25bn (£621m) into the firm as part of its plan to become a full-service investment house, with eventual plans to largely bypass investment banks all together.
The revised filing, lodged with the US Securities and Exchange Commission yesterday, also highlighted that KKR had been drawn into the US Department of Justice's probe into whether or not private equity firms had been acting in collusion on so-called club deals where one or more works together to make a joint bid for a target company.
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