Corporate America is on sale.
Syndicated lenders say the recent 15% devaluation in the stock market may be good news for the bank loan market as leveraged buyout firms look to buy bargain-priced companies.
Helping fuel the speculation is bankers' estimates that LBO firms have stashed away $80 billion for a market correction.
As one banker described it, "With that kind of money on the sidelines, who's going to pass up an opportunity to buy a company for 20% off?"
Bill H. Gates, head of originations at Lehman Brothers, said conditions seem to be right for strong LBO activity in the second half.
"Corporate acquirers that would have used their stock to buy a company aren't going to use their stock when it's devalued," Mr. Gates said. "For the LBO guys who work with cash and leveraged debt, they can start to compete with corporate buyers."
Lehman has enjoyed a robust LBO year, participating in three deals, worth $1.9 billion.
That's already up from all of 1997, when Lehman participated in three deals, worth $645 million.
LBO players try to take companies private at bargain-basement prices, fix them up, and then resell them to an eager public at huge markups.
Bankers say that this year LBO sponsors are more likely to use bank debt, as opposed to high-yield bond debt, because investors are demanding more yield in a riskier economic environment. Higher yields make junk bonds more expensive for borrowers.
Even if those forecasts are right, lending to the LBO industry this year still may fall short of 1997 volume, the largest on record.
Through Sept. 4, lenders reported 15 LBO-related deals, worth $5.4 billion. For all of 1997 lenders reported 56 deals, worth $15.9 billion, according to Securities Data Co.
Mergers and acquisition lending, however, is on a pace to rival last year's record.
Through Sept. 4 lenders reported 181 M&A-related deals, worth $159 billion. Lenders reported 313 deals, worth $202 billion in 1997.
Not everyone thinks the LBO market has been primed by the stock market's downturn.
An analyst with a leading corporate credit ratings agency, said banks are "barking up the wrong tree" if they think LBO firms are going to come knocking.
"A correction doesn't put any juice into a takeover candidate," the analyst said. "LBO companies look for a candidate's businesses, and for that reason I think the deals that were going to be done have been done."
