KKR Boots' debt may devolve on underwriters

Mumbai: A consortium of banks comprising Deutsche Bank AG, JP Morgan Chase & Co. and UniCredit SpA that managed the leveraged buy-out of Alliance Boots Plc by Italian billionaire Stefano Pessina and New York buy-out firm KKR, is now left holding on to £250 million pounds of its second-tier debt. ((See: KKR-Pessina combine to buy Alliance Boots for $22.2 billion)

Italian billionaire Stefano Pessina and New York-based KKR in New York had agreed to buy Nottingham, England-based pharmacy chain Boots in April in Europe's biggest leveraged buyout.

The banks sought to reduce the amount they lent by syndicating debt to a wider group of banks and money managers.

The bankers, who last month arranged £5 billion tier-1 loan syndication for the acquisition of Alliance Boots, will only syndicate £750 million of a planned £1 billion pounds of loans.

The group, who were underwriters to the debt issue, failed to find investors for tier-2 debt that ranks last for repayment and pays the highest interest, sources associated with the deal said.

The underwriters withdrew the offer of tier-2 loans, debt that ranks after senior loans for repayment. Kohlberg Kravis Roberts & Co.'s bankers, who last month pulled £5 billion of senior loans, will only syndicate £750 million of mezzanine debt that ranks last for repayment and pays the highest interest.

KKR's banks, which also include Barclays Capital, Citigroup Inc. and Royal Bank of Scotland Group Plc, failed to attract investors to the Boots financing, even after discounting the price of the tier-2 loans to 96 per cent of face value, by reducing their own underwriting fees.

KKR had increased the interest margin offered to 4.25 percentage points over benchmark the London interbank offered rates, 25 basis points more than initially proposed price.

The aborted tier-2 loans increase the New York- based KKR's underwriters Boots' debt to $16.8 billion.

Boots brings to focus a global credit crunch that has brought leveraged buyouts to a standstill amidst a bunching of takeovers of large companies by financial investors in recent times.

Recent leveraged acquisitions have left Wall Street's underwriters with $400 billion of debt they can't sell, according to analysts.