Legal Commentary

Financing Mergers & Acquisitions

By davidwanetick

The credit crisis is impeding mergers and acquisitions. One reason is that the corporate loans used to finance buyouts are languishing in the secondary markets. For instance, loans of Freescale Semiconductor are trading at a 15.5% discount of their original value and loans used to finance Sam Zell's acquisition of Tribune Co. are trading at a 26% discount. Investors have little incentive to buy new loans (issued for purposes of making acquisitions) unless they are sold at steep discounts.
 
Other reasons why demand for buyout-related loans is waning include that lower interest rates provide less return potential for investors in such loans and the fact that defaults on leveraged loans is already rising. Already in 2008, nine companies have defaulted on leveraged loans, more than the two defaults during all of 2007.

Also, as The Wall Street Journal pointed out, hedge funds are being pushed out of the market as facilities called total return swaps unwind. Total return swaps are set up by banks for hedge funds and other investors to buy loans with borrowed money. As the value of the loans declines, provisions in these swap agreements are being triggered that act like margin calls to unwind the contracts.

A further concern with the secondary markets difficulty in digesting corporate loans is that many companies purchased these loans and placed them on their balance sheets under marketable securities. While the assumption was that these securities are near cash equivalents, their discounts in the secondary markets may cause a wide array of companies (not just financial firms) to take write-downs.

These are some of the issues that will be discussed at The Business Development Academy's Mergers & Acquisitions Seminars. One seminar - Financing Mergers & Acquisitions - will hit these issues dead on. For more information, please visit www.bdacademy.com.

Full post as published by Vertical Pulse on February 11, 2008 (boomark / email).