Kohlberg Kravis Roberts & Co. is close to making a concession to the banks financing its $26 billion leveraged buyout of payment processor First Data Corp, a source said on Monday.
The move comes as the credit crunch forces private equity firms to reluctantly renegotiate deals with banks, which face steep losses from holding loads of unwanted debt on their balance sheets.
KKR has agreed to a covenant that places performance criteria on First Data's debt, a source familiar with the matter said. The Wall Street Journal reported late on Sunday that the firm had agreed to maintain a certain level of earnings before interest payments, depreciation, tax and amortization in relation to the senior debt.
Adding a covenant makes it easier for the investment banks to sell the debt to investors that are worried about the deal's risks.
Although it is a fairly standard agreement, such a move would be a major concession for KKR, which previously been unwilling to budge on financing terms. Adding a covenant puts greater pressure on KKR to meet the EBITDA standard and could mean lowering the returns expected from the deal.
That KKR is willing to add a covenant shows just how nervous investment banks are now that the credit crunch has frozen much of the leveraged buyout industry. KKR declined to comment.
With investors no longer willing to gobble up securities flowing from the LBO frenzy, banks are stuck with more than $330 billion of debt on their balance sheets. They now face the prospect of selling part of the debt at a discount, taking a heavy hit on the loans.
The banks on the First Data deal have claimed they would face losses of as much as $1.5 billion if the terms were not altered, the Journal said.
Credit Suisse and Citigroup are the leaders in arranging First Data's $16 billion loan. Other banks on the deal include Deutsche Bank, HSBC, Lehman Brothers, Goldman Sachs and Merrill Lynch.
A KKR concession also shows how strained relations between Wall Street banks and large buyout firms have become.
Frothy debt and credit markets allowed the private equity firms to raise huge pools of capital and to carry out the largest LBO deals ever.
Through August, more than $700 billion of LBOs were announced this year, double year-earlier levels. Large publicly traded companies worth tens of billions of dollars, such as Equity Office Properties Trust, TXU Corp, Hilton and Harrah's, have all agreed to private equity buyouts in the last year.
As a result, private equity buyers provided a gravy train of fees to Wall Street through advising and arranging the deals. Wall Street paid LBO firms more than $11 billion in fees this year alone.
LBO financing was so lucrative for the banks that they offered cheap and easy loans to buyers without any covenants, which up until the last few years were standard.
But when the credit crunch hit this summer, debt investors stopped buying, and banks were stuck with the loans.
KKR has tended to strictly enforce its deals with the banks, maintaining that those were terms they agreed to. But the credit market picture has only gotten worse in the last few months.
With deals such as First Data and TXU, KKR is responsible for a good chunk of the $330 billion of outstanding debt.
The expectation was that after last week's Labor Day holiday, some investors would return, and the banks could begin trying to unload the debt.
The sale of the First Data debt financing is expected to start by mid-week, the Journal said.
Reuters reported last week that the banks were out marketing smaller portions of the debt from the deal to see what kind of price they could get. Anything in the 95 cents to the dollar range is seen as reasonable but anything lower is seen as a heavy hit to their balance sheets.
(Additional reporting by Lewis Krauskopf)