Caution Grows On Use Of Staple Finance

Buyout shops may become more cautious about attaching staple financing to go-private deals in the future, if the Del Monte LBO case proves to have lasting value as a precedent, leveraged lending lawyers say.

But the case is less likely to affect other kinds of deals, such as corporate carve-outs or sponsor-to-sponsor handoffs, where outside investors would have less standing to complain about the potential conflicts of interest if the investment banker shopping a target also offers a loan package to a buyer.

In any case, the risks have been there all along that a banker could try to steer a deal toward a buyer who would be more likely to use the banker’s financing, the lawyers said.

“Whether you’re the seller, the buyer or the bank, people will certainly think carefully” about staple financing, said David A. Brittenham, a partner in the New York law firm Debevoise & Plimpton LLP and the chairman of its leveraged finance group.

The issue got fresh attention this month after Del Monte, the big food company, and its bank, Barclays Capital, agreed to pay $89.4 million to settle a lawsuit that BarCap had improperly steered Del Monte last November toward a consortium of Kohlberg Kravis Roberts & Co., Vestar Capital Partners and Centerview Partners in a $5.3 billion deal, which included $1.3 billion in assumed debt.

Plaintiffs’ lawyers used their announcement of the settlement to brag that they had reformed a corrupt practice in banking. “We believe the settlement delivers to Del Monte’s common shareholders the added premium they rightly deserved through the buyout, and we are gratified that our litigation sparked a pullback among major banks of advising parties on both sides of a transaction,” said Randall Baron, a partner at Robbins Geller Rudman & Dowd in a prepared statement. His firm, along with Grant & Eisenhofer, represented the NECA-IBEW Pension Trust Fund, a Decatur, Ill., pension fund, as lead plaintiff in class action lawsuit.

The lawyers also cited a story by Bloomberg indicating that Wall Street had pulled back from staple financing in the wake of the Del Monte decision, a February injunction by Vice Chancellor J. Travis Laster in Delaware Chancery Court that caused a 20-day extension in Del Monte’s ”go-shop” period.

Attorneys contacted by Buyouts, however, were more circumspect in their analysis. For one thing, multi-billion dollar LBOs have been scarce since the financial crisis, limiting the pool of cases to compare. And because the evidence on staples is largely anecdotal—sister service Thomson Reuters LPC, which tracks the loan market, doesn’t have data on staples—conclusions can be difficult to draw.

Then there’s the question of market conditions. “Sometimes banks are eager to provide staple financing, and sometimes they’re not,” Brittenham said. When the Del Monte financing came to market last winter, credit was easy. The company was able to get covenant-lite terms on its $750 million asset-based revolving credit and $1.3 billion in senior unsecured notes, as LPC reported at the time. The loan priced in mid-February at LIB+300 with a 1.5 percent floor and a 99.75 original issue discount. The loan was originally talked at LIB+400 with a 1.5 percent Libor floor and an OID of 99.

Since then, credit markets have undergone a series of shocks, including a downgrade of the United States’ sovereign credit rating and threats of defaults by governments including Greece and potentially others. Such events have dampened lenders’ appetite for risk, sending spreads wider and discounts deeper.

“It may be a little early to try to discern trends,” Brittenham said. “The decision came down in February. The market turned in July. It’s hard to get financing of any kind today.”