Bloomberg, Sean B. Pasternak & Frederic Tomesco, 17 July 2007
Toronto-Dominion Bank said it agreed to provide C$3.8 billion ($3.64 billion) in financing for the proposed takeover of BCE Inc. by investors that include the Ontario Teachers' Pension Plan.
Canada's third-biggest bank will lend C$3.3 billion and buy C$500 million in BCE stock, in the largest private-equity financing ever for the Toronto-based company.
Toronto-Dominion joins other lenders including Citigroup Inc. that will provide C$34.3 billion in credit for the world's biggest leveraged buyout. BCE, based in Montreal, is Canada's largest phone company.
``While these commitments are large, they were entered into following the bank's normal processes and are within the risk tolerances provided for in the bank's risk management framework,'' Toronto-Dominion said in a statement today.
The investment group will put up about C$8 billion and borrow the rest for the buyout, Teachers' Senior Vice President Jim Leech said. He declined be more specific or say when regulatory documents would be filed.
``We are still tweaking and fine tuning,'' Leech said in a telephone interview from Toronto today. ``We'll have the final numbers when we file our regulatory documents.''
Under the C$51.7 billion takeover, which includes debt, Teachers' will own 52 percent of BCE, while Providence Equity Partners Inc. will own 32 percent and Madison Dearborn Partners LLC will have 9 percent. The proposed takeover, announced June 30, is expected to close next year.
Toronto-Dominion, which helped advise the Ontario Teachers' plan on the purchase, plans to ``syndicate,'' or distribute the debt and equity to other banks and investors. BCE's financial advisers also included Citigroup, Royal Bank of Scotland Group Plc and Deutsche Bank AG.
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Dow Jones Newswires, 17 July 2007
Toronto Dominion Bank said it has underwritten C$3.3 billion of a C$34.3 billion (US$32.9 billion) credit facility and provided a C$500 million equity bridge facility to a group of institutional investors led by Ontario Teachers' Pension Plan Board in support of their bid to acquire BCE Inc.
The Toronto-based Canadian chartered bank said the commitments "were entered into following the bank's normal credit processes and are within the risk tolerances provided for in the bank's risk management framework."
In the ordinary course, the bank would expect to syndicate these commitments among other financial institutions and investors, it noted.
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The Globe and Mail, Sinclair Stewart & Boyd Erman, 17 July 2007
Toronto-Dominion Bank has agreed to commit about $4-billion in capital to help finance the record takeover of BCE Inc., including purchasing a half-billion dollars worth of equity that will give the bank a 7-per-cent ownership stake in the telecommunications company, according to people familiar with the matter.
These sources said TD offered to put up $500-million for a minority stake in Montreal-based BCE to help Ontario Teachers' Pension Plan and two U.S.-based private equity suitors raise sufficient Canadian equity for their $35-billion takeover bid, which was endorsed by BCE's board late last month.
Teachers, which will own 52 per cent of the equity, has disclosed that U.S.-based Providence Equity Partners and Madison Dearborn Partners will together hold 41 per cent, but it has declined to identify the owner of the remaining 7 per cent.
The plan is for TD, which has $400-billion of assets, to unload its equity stake to other large Canadian investors once the deal is approved.
The bank will likely start feeling out prospective buyers in coming weeks, the sources said.
“It's a very gutsy call,” one person close to the process said of taking on the equity portion.
“Many banks are trying to squash this.”
The arrangement, known as a bridge equity loan, has become an increasingly controversial one in banking circles, with some major firms, like JPMorgan Chase & Co., saying they want to end the practice because the returns rarely justify the amount of risk to which they may be exposed.
The fear is that banks will not be able to sell the equity they purchase to other investors if the market drops, leaving them to keep the investment on their books and face a possible writedown on its value if markets soften.
TD's equity bridge in the BCE deal appears to be the largest yet by a Canadian bank, and sources close to the Teachers consortium said the arrangement was a “critical” component in finalizing the deal, on which TD stands to earn big fees for advisory work and lending. In addition to the equity loan, the bank has $3.5-billion worth of capital commitments, which include long-term debt and credit facilities.
Finding enough Canadian equity was a stumbling block during the BCE auction, given federal rules that cap foreign ownership in telecom companies at 46.7 per cent. TD agreed to step in with an equity commitment for Teachers at a time when rival bidders, including a group led by the Canada Pension Plan Investment Board, appeared to have locked up investment dollars from many of the country's leading pension funds.
The investment by TD comes at a time when the business of doing leveraged buyouts, which has boomed for years, faces headwinds amid reticence on the part of debt investors to buy the bonds needed to finance the debt-heavy purchases.
And while TD has specialized in the telecom business over the years, the results haven't always been pretty: The bank set aside $2.9-billion in 2002 to cover bad loans, many to telecom companies.
After that, the bank shifted its emphasis to retail banking, but in recent years chief executive officer Ed Clark has returned to a greater focus on TD's investment bank.
“Taking down equity of that size when you are a bank focused on retail, that's pretty ballsy,” said a rival Canadian investment banker. “They were saying a few years ago their focus was retail. Now we're seeing them use their capital much more aggressively to support their wholesale side.”
“It will be a giant revenue stream for them if it's all successful,” the banker added.
Still, many firms are leery of equity bridges because, while regular debt bridges are at least secured by assets, equity stakes have last claim on assets.
“Bridge equity is not liquid and there's no clear market in which to price it, so if there are storm clouds brewing you can't blow it out,” said a senior deal maker at a U.S.-based investment bank. “The problem you have with capital markets is the risks increase every day, every hour you hold something.”
Because of that, “there's almost not enough money to pay you for the risk,” the banker said.
The total amount of the equity component in the BCE offer is $7.5-billion, a figure that includes the $2-billion worth of BCE shares that Teachers already owns.
In addition to TD, the lenders providing the $34.35-billion of debt financing are Citigroup Inc., Royal Bank of Scotland and Deutsche Bank, according to documents filed with Canadian regulators.
The figures were blacked out in the documents, but by cutting-and-pasting the redacted section into a fresh word-processing document, it is possible to view the numbers.
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Bloomberg, Caroline Salas and Miles Weiss, 17 July 2007
Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of Wall Street are stuck with at least $11 billion of loans and bonds they can't readily sell.
The banks have had to dig into their own pockets to finance parts of at least five leveraged buyouts over the past month because of the worst bear market in high-yield debt in more than two years, data compiled by Bloomberg show.
Bankers, who just a few months ago boasted that demand for high-yield assets was so great that they would have no problem raising debt for a $100 billion LBO, are now paying for their overconfidence. The cost of tying up their own capital may curb earnings and stem the flood of LBOs, which generated a record $8.4 billion in fees during the first half of 2007, according to Brad Hintz, the former chief financial officer at New York-based Lehman Brothers Holdings Inc.
``The private equity firms, being very tough negotiators, are unlikely to let the banks off the hook,'' said Martin Fridson, chief executive officer of high-yield research firm FridsonVision LLC in New York. ``They'll say that's your problem and that's why we're paying you: To take risk.''
As the market began to turn sour last month, Goldman Sachs, Citigroup Inc., Lehman and Wachovia Corp. had to buy $725 million of bonds that Goodlettsville, Tennessee-based Dollar General Corp. was selling to finance Kohlberg Kravis Roberts & Co. purchase of the company for $6.9 billion. All of the securities firms are based in New York, except Wachovia, which is located in Charlotte, North Carolina.
Those bonds are probably worth 94 cents on the dollar, or $43.5 million less than when they were sold on June 28, according to Justin Monteith, an analyst at high-yield research firm KDP Investment Advisors in Montpelier, Vermont. KKR completed the acquisition of Dollar General on July 9.
Bear Stearns Cos. strategists estimate that about $290 billion of deals still need to get funded, including those of Greenwood Village, Colorado-based credit-card processor First Data Corp. and energy company TXU Corp. of Dallas.
The question is ``how much yield are the brokerage firms going to have to eat,'' said Hintz, who is now an analyst at Sanford C. Bernstein & Co. in New York. ``What they've committed to is not current trading rates in the market. If I have a problem it doesn't mean I can't place the problem, but it's going to cause a mark-to-market loss.''
Acquisitions by private equity firms such as New York's KKR and Blackstone Group LP helped push sales of high-yield bonds and loans worldwide up more than 70 percent during the first half of the year to a record $708 billion, according to data compiled by Bloomberg. High-yield, or junk, bonds are those rated below Baa3 by Moody's Investors Service and BBB- by Standard & Poor's.
The investment banking fees generated by LBOs in the first half amounted to almost two-thirds of the $12.8 billion paid by LBO firms to Wall Street in 2006, data compiled by Freeman & Co. and Thomson Financial show. In the race to win deals, the five largest U.S. investment banks more than tripled their lending commitments to non-investment grade borrowers during the past year to $174 billion, according to their regulatory filings.
KKR co-founder Henry Kravis in May called it the ``golden era'' of buyouts at a conference in Halifax, Nova Scotia. The extra yield investors demanded to own junk bonds rather than Treasuries shrank to a record low of 2.41 percentage points in June from the peak of more than 10 percentage points in 2002, according to index data from New York-based Merrill Lynch & Co. The spread has since widened to 3.07 percentage points.
For loans rated four or five levels below investment grade, the spread over the London interbank offered rate shrank to 2.12 percentage points in February from more than 4 percentage points in 2003. It has since widened to 2.72 percentage points.
Some bankers even speculated that $100 billion LBO was possible, a scenario that is now ``definitely'' off the table, said Stephen Antczak, high-yield strategist at UBS AG in Stamford, Connecticut. Wall Street's confidence in its ability to finance just about any deal led buyout firms to remove clauses in their purchase agreements that would allow them to back out if their banks couldn't come up with the financing.
Just three of the 40 biggest pending LBOs have an escape clause that lets the buyer back out if funding can't be arranged, said Mike Belin, U.S. head of equity derivatives strategy at Deutsche Bank AG in New York. A couple of years ago, a majority of deals included a financing contingency, Belin said, based on his research.
``If you were a credit officer or a risk manager who said `No' to virtually anything over the last few years you were wrong,'' Hintz said. ``So did they take it too far? Well, yeah. But that's part of any cycle. The issue is did they take it too far and is it going to hurt their earnings.''
Tribune Co.'s agreement to be bought by billionaire Sam Zell is one of the three acquisitions with an escape clause. Zell or Tribune can back out of the purchase if funding can't be obtained ``on the terms set forth in the financing commitments'' or on similar terms, according to regulatory filings.
Zell agreed to pay $25 million to Tribune, owner of the Los Angeles Times and Chicago Tribune, should the financing fall through. Tribune spokesman Gary Weitman said banks have ``fully committed'' to the deal.
The market for high-yield bonds and junk-rated, or leveraged loans began to crack in June as concerns that LBOs were becoming too risky coincided with a slump in the market for subprime mortgages that caused the near-collapse of two Bear Stearns hedge funds.
Junk bonds lost 1.61 percent last month, the most since March 2005 when General Motors Corp. forecast its biggest quarterly loss since 1992 and the debt lost 2.73 percent, according to Merrill Lynch.
Investors refused to buy bonds to finance purchases of companies including Dollar General and ServiceMaster Co., forcing bankers to either buy the bonds themselves or extend a loan to make up for the securities that weren't sold.
In most deals, investment banks promise to provide loans to the buyer. They then seek other lenders to take pieces of the loans and find buyers for bonds. When buyers vanish, the banks must either buy the bonds themselves or provide a bridge loan to the borrower, tying up capital that would otherwise be used to finance more deals. The banks typically parcel out portions of bridge loans to reduce their risk.
Citigroup, the biggest U.S. bank, reported that its securities and banking division recorded an expense of $286 million in the first quarter to increase loan-loss reserves to account for higher commitments to leveraged transactions and an increase in the average length of loans.
Lehman reported on July 10 that its commitments for ``contingent acquisition facilities'' more than doubled in the quarter ended May 31 to $43.9 billion, exceeding its stock market capitalization of $39.1 billion. Lehman said its commitments contain ``flexible pricing features'' that allow it to charge more if market conditions deteriorate.
Goldman Sachs more than doubled its lending commitments to non-investment grade borrowers to $71.5 billion in the year ended May 31.
Citigroup spokeswoman Danielle Romero-Apsilos, Lehman spokeswoman Tasha Pelio and Goldman Sachs spokesman Michael Duvally, either declined to comment or didn't return phone calls.
JPMorgan failed to sell $1.15 billion of bonds for Memphis, Tennessee-based ServiceMaster on July 3. The banks provided ServiceMaster, the maker of TruGreen and Terminix lawn-care products, with a bridge loan to make up for the failed bond sale. ServiceMaster is being bought by private equity firm Clayton Dubilier & Rice Inc. for $4.7 billion.
KKR and New York-based Clayton Dubilier this month completed their $7.1 billion purchase of Columbia, Maryland-based US Foodservice, a unit of Dutch supermarket company Royal Ahold NV, even though junk bond investors refused to buy $1.55 billion of bonds and $3.37 billion of loans to finance the deal, according to estimates from New York-based Bear Stearns.
Deutsche Bank led the bond offering, which included $1 billion of ``toggle'' bonds that would have allowed US Foodservice to pay interest in either cash or additional debt. KKR and Clayton Dubilier relied on loans to complete the deal, according to S&P's Leveraged Commentary and Data unit.
``Many of these things are beyond our risk desires,'' said Bruce Monrad, who manages $1.5 billion of high-yield bonds at Northeast Investment Management Inc. in Boston.
JPMorgan spokesman Adam Castellani, Deutsche bank spokesman Scott Helfman and Morgan Stanley spokeswoman Jennifer Sala either declined to comment or didn't return calls. All the banks are based in New York, except Deutsche Bank, which is in Frankfurt.
Banks can always sell the debt if demand increases. Meanwhile, they may have to report a loss from the decline in value of their holdings, a process known as marking to market.
Banks could also lose money should they have to offer discounts on loans in order to syndicate the deals, said Tanya Azarchs, a banking industry analyst at New York-based S&P.
``I don't think it's going to cause banks to fail or even lead to downgrades,'' Azarchs said. ``But I do think there will be a little indigestion and lower earnings.''
The biggest concern is ``hung deals,'' where a lender is left holding a large loan to a single borrower, said Azarchs. ``Those traditionally in all the prior credit cycles have caused the greatest amount of grief for the large syndicating banks,'' Azarchs said.
In 1989, First Boston Corp., now part of Credit Suisse, made a bridge loan for a buyout of Ohio Mattress Co., the predecessor to Sealy Corp. The junk bond market collapsed before First Boston could refinance the loan, and the securities firm ended up owning a big stake in the bedding manufacturer.
The deal became known as ``Burning Bed.''
``The thing about this business is memories are two seconds long,'' said James Schell, a private equity attorney in the New York office of Skadden, Arps, Slate, Meagher & Flom LLP.
Banks led by Citigroup committed to extend $37.2 billion in credit to fund the purchase of TXU by a group that included KKR, Fort Worth, Texas-based TPG Inc. and Goldman Sachs's private equity group. The financing will comprise $25.9 billion of term loans and $11.3 billion in an unsecured bridge loan.
Credit Suisse, based in Zurich, is leading banks in the U.S. that have agreed to provide KKR with $16 billion of loans for its $26.1 billion takeover of First Data. The plans include an $8 billion bond sale, which is scheduled for August or September, according to a Banc of America Securities LLC research report.
For firms such as KKR or Blackstone, both based in New York, the tighter credit environment may make their acquisitions less profitable and even change the way they go after future targets. Mark Semer, a spokesman for KKR, declined to comment.
``The underwriters are going to be forced to provide bridge loans and it's getting pretty ugly, but Wall Street deserves to get smacked around a little,'' said William Featherston, managing director in high-yield at J. Giordano Securities LLC in Stamford, Connecticut. ``It's been easy for so long.''
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