Era of Bloated LBO Profits May Be Over - Barron's

Most leveraged buyouts look likely to happen in the calm after this summer's credit storm. Yet some, like KKR Investment's $29 billion LBO of First Data Corp. and Lehman/Tishman-Speyer's $21B LBO of REIT Archstone-Smith Trust may be over-leveraged profit-busters. Archstone's annualized cash flow is just 70% of its projected $1.04B interest payments. After investors bought $10B of debt secured by Archstone's prime real estate, Lehman Brothers, Banc of America and Barclays are wooing investors to buy some of the $4.6B in Archstone bridge equity they loaned based upon future profits from higher rents. In today's housing market, profits won't be easy. Investors may decline such bottom-of-the-capital-structure equity. Apartment REIT shares are down, and public REITs offer liquidity and better value. KKR and First Data expect profit and revenue growth of 8-10% annually. If not, annual capital expenditures ($400 million) and interest costs from $22B of First Data's debt ($2.1B) could match or top 2008 and 2009's $2.5B projected cash flow (up from $1.8B in 2007) Flipping is out of the question because the $29B buyout price was a peak and new debt would be more expensive. Banks sold $5B of debt this week (see full story). Of the $17B left, $9B are junk bonds. Barron's says investors would need 13% yields on the junk to get interested. KKR may never profit from this deal.

Sources: Barron's
Commentary: KKR’s George Roberts Deserves the 'Honest John of the Week' Award • KKR Financial Denies IPO Delay: Bad News • Inbox Message Re: KKR Financial Holdings
Stocks/ETFs to watch: KFN, ASN, FDC, HAR. ETFs: RWR, VNQ

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