Investment Dealers’ Digest – November 10, 2008
Hexion Deal Tests LBO Waters:
PE firms may face different deal environment if Credit Suisse and Deutsche are forced to finance Hexion buyout
Investment Dealers’ Digest – Kelly Holman, 2008-11-10
At a time when the credit crunch and economic downturn have derailed more than one leveraged acquisition, a New York court is set to determine whether Credit Suisse and Deutsche Bank should proceed with financing Hexion Specialty Chemical’s $10.6 billion buyout of Huntsman. Specifically, the two banks may be forced to fund $9.4 billion in senior secured debt and $5.9 billion in senior secured second-lien bridge loans for the acquisition by Hexion, a portfolio holding of Apollo Management.
The implications for Credit Suisse and Deutsche Bank are obvious: the pair of banks face the prospect of a large markdown on the debt arranged prior to the credit crunch. But, the outcome for the leveraged buyout business could be more far-reaching, say investment bankers and private equity executives alike.
“If the courts force the financing it will cause banks to become more selective and more disciplined in their lending, and drive up the cost of capital,” says Nicholas Kirk, a managing director at The Hickory Group, a New York investment banking boutique. “This is a very significant step and something that banks have feared for a number of years,” he adds.
John Jonge Poerink, managing partner of New York private equity firm Linley Capital, agrees on the significance of the case.
“Private equity firms and all parties involved in a deal will be much more specific about when you can step out of a transaction.”
The trial for determining whether the two banks will be required to finance more than $15 billion of debt for Huntsman’s purchase is scheduled for Jan. 8, 2009.
Credit Suisse and Deutsche Bank’s financing commitment letter expired on Nov. 1. While Hexion had sought to extend the expiration date for the banks’ financing commitment, a judge declined the company’s request and Credit Suisse and Deutsche Bank responded by issuing a joint statement on Halloween: “We’re gratified by this decision and we’ll continue to defend ourselves vigorously.”
The banks, says one private equity attorney who agreed to speak on the condition of anonymity, will likely argue the issue of solvency.
Credit Suisse and Deutsche Bank have questioned the validity of the solvency opinion and solvency certificate submitted by Hexion and Huntsman, respectively, over the combined entity’s solvency.
But, Hexion disputed the argument by the banks and filed suit against Credit Suisse and Deutsche Bank on Oct. 29 in New York, alleging the two banks breached their obligations to fund the deal’s closing.
As a result of the legal logjam between Hexion and Huntsman, banks are closely evaluating their financing commitment letters, says the attorney. For now, the issuance of such letters where one or more banks express their willingness to finance a merger has pretty much stopped.
Meanwhile, New York-based Apollo is on the hook to pay more than the $325 million termination fee in the merger agreement. A Delaware court has decided that Columbus, Ohio-based adhesive resin maker Hexion will face uncapped damages.
Additionally, Apollo is facing another payout if a suit lodged by Woodlands, Texas-based chemical company Huntsman comes to fruition. Huntsman’s $3 billion suit against Apollo and firm executives Leon Black and Joshua Harris is scheduled for trial in Texas on Feb. 9, 2009.
Apollo, meanwhile, has already taken another step to commit additional equity to support the buyout. In late October, it increased the size of its equity investment by $210 million, boosting its total commitment to the transaction to $750 million. It also took the unusual step of deferring a $100 million transaction fee and portfolio monitoring fees for the next three years. Additionally, Huntsman shareholders Citadel Investment Group, D.E. Shaw and MatlinPatterson Global Opportunities and the Huntsman family have committed an additional $416 million in financing.
The most likely outcome for the $28-per-share deal is that it will be settled with a revised purchase price. That’s how Bain Capital Partners and Thomas H. Lee Partners settled their purchase of San Antonio, Texasbased radio company Clear Channel with a syndicate of Wall Street banks.
Last Thursday, Huntsman issued its third-quarter results. It posted adjusted Ebitda of $193.9 million on $2.7 billion of revenues.