Wall Street is getting an early warning from the stalled leveraged buyout of Veritas Software. Banks led by Morgan Stanley and Bank of America are on the hook for $5.6 billion after weak demand persuaded them to postpone the refinancing of debt backing Carlyle’s $8 billion acquisition of Symantec’s data-storage unit. Simple jitters in the short-term bond market may be to blame. It’s a reminder, though, that helping dealmakers pile leverage on low-rated companies carries risks.
Just a couple of weeks ago, investors might have lapped up the deal, which contains a mixture of secured and unsecured loans and bonds. The demand for high-yield debt has waned, though, as market volatility has increased. Bankers couldn’t save the refinancing even by offering the paper at a discount and promising to keep a $700 million chunk on their books.
As the largest LBO of the year, Veritas was an obvious target for nervous investors’ scrutiny. There are issues specific to its business, too. Revenue for the 2015 financial year, which ended in April, was just 2 percent higher than the year before. What’s more, the unsecured bonds banks were trying to sell for the company are deep in junk territory, carrying a triple-C rating from two different agencies.
The larger concern, though, is that the Veritas setback may presage broader trouble for efforts to use high-yield loans and bonds to finance takeovers. Deal flow, bank revenue and banker bonuses could all suffer as a result.
Luckily, lenders have so far not been nearly as generous with their institutions’ balance sheets as they were in 2007. Back then, a cascade of stalled LBO refinancings left many of them with tens of billions of dollars of exposure on their books. The Veritas stumble may be just the scare they need to ensure that they don’t overdo it again.