GM's (NYSE: GM) sales of its Allison transmission unit show that risky debt is getting harder to come by. Private equity investors buying the unit for $5.6 billion are delaying the sale of bonds due to lack of interest.
According to The Wall Street Journal [subscription required]: "The deal is being financed by $3.5 billion in corporate loans and another $1.1 billion worth of junk bonds." Lehman (NYSE: LEH), Citigroup (NYSE: C), and Merrill Lynch (NYSE: MER) were planning to sell the bonds to institutional investors. So far, the demand has not been there.
If the investment houses cannot sell the bonds, they will have to hold the debt themselves.
As Wall St. does more and more high risk/junk debt deals and investment banks take on more risk financing the deals themselves, investors should be worried about the future consequences. If savvy institutions do not want the debt, why would it be prudent for the bankers to keep it? For deals already in the pipeline they have an obligation, but that will probably mean that their appetites will disappear soon.
And, that means that the next deal that looks like Allison won't get done.
Douglas A. McIntyre is a partner at 24/7 Wall St.
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Reader Comments (Page 1 of 1)
7-24-2007 @ 3:25PM
Gumby said...
Forget crossovers they are still gas guzzlers!!!