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Not all leveraged buyouts are falling apart.


private-equity group closed Tuesday afternoon on its $11.4 billion purchase of medical device company


( BMET). That's notable enough in light of highly publicized problems in the LBO world, such as last week's collapse of Kohlberg Kravis Roberts' purchase of audio company



and ongoing concerns about financing tied to KKR's recent acquisition of First Data.

But not only did private-equity companies manage to complete a $46-a-share purchase of Warsaw, Ind.-based Biomet. Their underwriters, led by

Bank of America

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, were able to place $2.35 billion of high-yield bonds -- including some risky, aggressive paper known as pay-in-kind toggle notes that essentially give the borrower the option of paying down obligations with more paper.

BofA's success in finding buyers for PIK toggle notes in the wake of a marketwide credit crunch says the LBO financing pipeline hasn't completely dried up. While much has been made about investors' reduced risk tolerance, the Biomet deal shows that "things are opening up in credit markets," says Brian Hessel, managing partner at Stonegate Capital.

Though Biomet's buyers include KKR, Texas Pacific,


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Goldman Sachs

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, this buyout has been a relatively low-key affair. Little ink was spilled over dynamics in the Biomet buyout as big names like

Home Depot

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took big haircuts to get deals done.

It appears the underwriters did their best to keep the Biomet deal off Wall Street's radar screen. The deal was done with no road show, or marketing, and it was distributed among a limited set of investors, say bond fund managers who were approached about the offering.

The timing wasn't bad either, as risk premiums for the credit derivatives index tracking high-yield bonds has narrowed to about 325 basis points over Treasuries, after hitting nearly 600 basis points over Treasuries in August, when liquidity all but dried up. In June, the index traded at record low spreads, under 250 basis points. Prices in the loan market have also retraced some of their losses as well, making it opportunistic for underwriters to attempt sales, hoping they will log smaller discounts.

"Wall Street banks are trying to be pretty creative," says Brett Barragate, partner in the banking and finance practice at law firm Jones Day. "They are trying to control the supply to a trickle so the market doesn't overflow."

Indeed, investment banks left with over $300 billion in financing commitments tied to the leveraged buyout frenzy of the past year are moving slowly to place junk bonds and leveraged loans. The strategy is risky if waiting too long means pricing deals in an economy sliding toward recession. But it could amount to firms' only hope of drumming up enough risk appetite to limit their losses.

Biomet sold $689 million of PIK toggle notes at 10 3/8%, $718 million of senior notes at 10% and $941 million of lower rated senior subordinated notes at 11 5/8%.

The Biomet deal was largely bought by the investors that participated in the bridge loan. They were allowed to flip the bridge loan -- the temporary financing that banks provide between when a deal is announced and when it closes -- into a bond at 98.25 cents on the dollar, says another fund manager who spoke on the condition of anonymity.

Bridge loan investors would have already collected some additional fees. The manager says the underwriters then approached outside investors with an offer of 96 cents on the dollar to buy the piece of the commitment that the banks held themselves.

The fund manager says that every point discounted below par roughly equals about 25 basis points of yield, so a deal at 98 means an extra 0.50% yield. The discount for outside investors would bring the 10% yield to 11%, and so on. The manager says he believes the underwriter had trouble selling the 11 5/8% notes.

Bank of America did not return a call seeking comment.

PIK toggles were a hallmark of the pre-credit crunch days, when debt issuers called all the shots. Back in the spring, risk premiums in junk bond and loan markets were at an all-time low, and investment banks competed heatedly for private equity's business by offering aggressive financing packages. The banks guaranteed deals with low coupons, no-financial-protection covenants and the ability to pay bonds back with more bonds -- the PIK toggle.

Indeed, a PIK toggle bond is included in the financing that Kohlberg Kravis Roberts obtained for its $29 billion buyout of First Data. But investors say bonds for that deal are not on the calendar at all at this moment. Indeed, selling just $5 billion of loans to help finance the First Data deal was difficult, as KKR had to make a so-called concession to get it done. KKR reportedly agreed to include a protective covenant in the loans, meaning roughly that investors would be ensured the company has enough money to make interest payments.

In keeping with TSC's editorial policy, Rappaport doesn't own or short individual stocks. She also doesn't invest in hedge funds or other private investment partnerships. She appreciates your feedback. Click


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