Deals

Gillian Tan is a Bloomberg Gadfly columnist covering deals and private equity. She previously was a reporter for the Wall Street Journal. She is a qualified chartered accountant.

Believe it or not, there is a silver lining in the fact that Carlyle Group slashed its purchase price for Symantec's data-storage business, Veritas.

Security Check
The security software company's stock has fallen roughly 28 percent in the past 12 months.
Source: Bloomberg

At first glance, the situation looks bleak: Strained credit markets mean banks still face hundreds of millions in potential losses from their upcoming sale of the more than $4.7 billion in debt that's financing the revised deal,  which was 2015's largest leveraged buyout. And Symantec shares extended their slump as investors accepted that the company will now receive $1 billion less than expected, meaning less firepower for future acquisitions or share buybacks.

But it's not all bad. Carlyle could have walked away from the deal, albeit at a cost: the break fee was $520 million and would have been split with lenders, according to people familiar with the matter. Instead, the buyout firm found a way to make it work. That wasn't the case for many of its peers in 2007 and 2008, when deteriorating credit markets meant more than a handful of LBOs were terminated rather than renegotiated.

Failed Buyouts
The credit crunch played a role in a handful of terminated private-equity deals during 2007/2008.
Source: Bloomberg

Also, there's good news for debt investors (and indirectly, bank shareholders and regulators too) among the bad tidings for lenders, who are poised to be hit with one of the largest collective losses in recent memory . It means banks will likely be more aggressive when it comes to negotiating favorable financing terms on future deals. Examples of these include demanding a higher minimum equity percentage that private-equity firms invest in a deal and more wiggle room when they are pricing loans or bonds if market conditions are declining.  In short, they probably will feel compelled to stick to less-risky lending, which may end up buoying credit quality.

Of course, it's only a silver lining for Carlyle as long as Veritas delivers on its projected earnings. If not, the company will struggle under its still-hefty debt load (now 5.8 times rather than 6.7 times earnings before interest, taxes, depreciation and amortization) if or when interest rates rise in coming years. One need only look to what happened when Bain Capital and Thomas H. Lee Partners forged ahead with a 2008 buyout of Clear Channel Communications , albeit at a lower price, and so far have little to cheer.

Veritas -- and other LBOs to come in 2016 -- could avoid that fate. There's no point fretting yet.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

  1. Losses will likely exceed those from financing the buyouts of retailer such as Toms Shoes, FullBeauty Brands and Rue21 and energy companies such as Express Energy Services.

  2. Now known as iHeartMedia.

To contact the author of this story:
Gillian Tan in New York at gtan129@bloomberg.net

To contact the editor responsible for this story:
Beth Williams at bewilliams@bloomberg.net