Future Buyouts May Use Mold Of GE Plastics
By DANA CIMILLUCA
August 20, 2007; Page C1
For one day at least, plastics may really hold the key to the future.
Later today, a group of banks including Citigroup Inc. plans to complete the sale of $1.5 billion of high-yield bonds related to the leveraged buyout of General Electric Co.’s plastics division. The bonds are part of an $8.2 billion package of debt issuance helping to pay for the $11.6 billion sale of the business to Saudi Basic Industries, announced in May. It will be the biggest sale of junk-rated debt since the July 31 sale of $6 billion of loans behind the sale of Chrysler LLC, according to Thomson Financial. Its completion would be a hopeful sign for the credit markets, which have suffered as nervous investors backed away from debt they perceived as risky.
That shift came at the worst time for leveraged-buyout firms, which need to sell roughly $300 billion of bonds and loans to pay for this year’s record-setting LBO pace. A successful sale of the debt today would be a step in wiping away some of that glut and would show that investor appetite still exists, at least for some issues.
The deal is a prelude to an even stiffer test in September, when payment-processing concern First Data Corp. will seek to raise $24 billion for its leveraged buyout by private-equity firm Kohlberg Kravis Roberts & Co.
The sale of the GE Plastics business is something of a special case. Though it appears on the surface as a standard corporate takeover, it is structured like an LBO. Sabic, as the buyer is known, is putting up only about 30% of the purchase price, for instance. The business will carry relatively high debt of 7.5 times earnings before interest, taxes, depreciation and amortization, and the new bonds will have a junk rating.
Market turmoil already caused the deal to be rejiggered. The sale was to include some euro bonds. Because of weak demand, those bonds were replaced by loans.
Unlike the expected First Data offering, the debt raised for the GE Plastics sale will have a fairly standard structure. It doesn’t include some of the liberal terms — such as the ability to make interest payments with new bonds rather than cash — that were a hallmark of buyout-related debt this year and that investors now find so distasteful.
It also is expected to draw strong interest from Middle Eastern investors. One big selling point for the underwriters is the participation in the deal of Sabic. The maker of chemicals, fertilizers, plastics and metals is 70%-owned by the Saudi government and has $14 billion in cash.
The new debt, which will include $6.7 billion of loans to be priced later this week, won’t be guaranteed by the parent. Mutlaq Hamad Al-Morished, Sabic’s finance chief, indicated it might as well be. “When Sabic buys a company, it will stand behind it,” he said Friday. “This is a deal that will close in a very difficult market.”
The sale also may provide a template for financing the next generation of LBOs. With banks wary of making new commitments with such a large funding backlog, one way to get new deals done may be for the corporations involved in asset sales to extend or stand behind the credit themselves.
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