Banks and private equity funds are locked in negotiation over a $300 billion backlog of acquisition loans. The problem is one of frustrated expectations; banks did not expect to be holding the paper that they have committed to fund.
The backlog is tipped to put the squeeze on lending and buyout volumes. Private equity specialists, however, cannot agree on whether the excess of committed finance will mean an end to covenant-lite lending and a return to more traditional structures.
"Buyout firms are finding it much harder to raise debt for new deals," says Phillip Mills at Davis Polk. "When liquidity conditions improve, it is likely that both the pricing and leverage levels will be worse for buyout firms relative to the extraordinary terms seen over the last few years." So once the indigestion passes, credit markets will re-price and settle down on this continuity view. Pricing will...