Vendor financing lifeline for private equity deals

By Douwe Miedema and Tessa Walsh

LONDON (Reuters) - Companies targeted by private equity firms are playing a greater role in financing their own buy-outs, throwing the sector a lifeline as tight credit markets have all but halted a once lavish deal flow.

Firms now often provide a vendor loan from their own books to ease financing when selling assets to reduce the amount of debt a bidder needs and bring down leverage ratios.

And private equity bidders are increasingly relying on staple financing, once a fall-back option with unfavourable conditions that few of them were keen to accept, given difficult loan market conditions.

"Vendors like ourselves of assets will find that it makes sense to try and put together the package in order that a wide variety of buyers have access to debt finance," said one sell-side banker working on such a deal.

"Given that the credit market is so difficult, it is necessary to put together a group of often a large number of banks to fund these larger transactions," he said, speaking under the condition of anonymity.

In a staple finance -- stapled to the back of a deal sheet -- a seller's bankers arrange a debt package through a group of other banks. Previously, the package was a target for bidders to beat, but it is now often the only way to get a deal done in difficult debt markets.

Before the credit crisis, private equity deals made up some 23 percent of overall M&A deal volume. In the first half of this year, that number had dropped to just 8 percent.

The overall deal volume dropped 35 percent on the back of the slide, to $1.58 trillion in the first half of 2008, from $2.43 trillion in the year-ago period.