Thursday, July 5, 2007

Big Investment Companies Start to Boycott LBO Debt

From Bloomberg:

The world's biggest bondholders have had their fill of leveraged buyouts, convinced that increasing mortgage delinquencies will drag down the U.S. economy and drive debt-laden companies into default.

TIAA-CREF, which oversees $414 billion in retirement funds for teachers and college professors, is boycotting some debt offerings used to finance LBOs. Fidelity International, a unit of the world's largest mutual fund company, and Lehman Brothers Asset Management LLC, the money-management arm of the third- biggest bond underwriter, say they're avoiding debt from buyouts.

Investors are getting skittish just as private-equity firms led by Kohlberg Kravis Roberts & Co. and Blackstone Group Inc. prepare to sell $300 billion of bonds and loans to finance LBOs, according to Bear Stearns Cos. In the past two weeks alone, more than a dozen companies were forced to postpone or restructure debt sales.

``There are some very scary analogies between high yield and the mortgage market,'' said Kevin Lorenz, a managing director who oversees $2.5 billion of high-yield assets at TIAA- CREF in New York. ``You cannot do fundamental analysis and believe that those are creditworthy companies.''

These are two big firms and one large money manager publicly stating they are concerned about the debt issued in some of the recent IPO deals. This is big news because it indicates the buyers market for the debt from these deals is shrinking.

LBOs have been a primary driver of the stock market in the most recent advance. Yet there has been a ton of news related to the mortgage bond and LBO business as of late -- none of which has been good.

If these deals go away or decrease, will the market still be able to advance? Is there another driver out there for increased stock prices?