Home Depot's (HD) troubled buyout

Over the course of last night, bankers and private equity interests battled over the funding for buying Home Depot's (NYSE: HD) wholesale supply business. JP Morgan (NYSE: JPM), Lehman (NYSE: LEH), and Merrill Lynch (NYSE: MER) have come close to walking away from the buy-out lead by Bain Capital, Carlyle Group and Clayton, Dubilier & Rice. The price for the unit may be cut by as much as $1.2 billion from its original $10.3 billion price.

The banks are concerned about the risky debt and the fact that the business is being hurt by the falling housing market, according to (subscription required) a story in The Wall Street Journal.

The banks have made billions of dollars from lending money to the larger private equity operators. When business was good the door to the vault almost always open. Now that it is clear that some of the buy-out loans will sour, the same lenders want to save their own skins.

Is there a solution to this, or will many of the largest private equity deals fall apart? One obvious answer is that private equity firms may have to put up more than the 10% or so that they normally like to contribute to these transactions. That would let them take on more of the risk and mitigate the problems for the banks. Another answer is that the price for deal like Home Depot and the Tribune (NYSE: TRB) will simply drop to adjust for risk, leaving the sellers holding the bag.

The most likely set of circumstances is that in more of these deals, the buyers will simply walk away. Current owners of these businesses will be left to make them work through cost cuts and supporting them financially until better times come around again.

Douglas A. McIntyre is a partner at 24/7 Wall St.