Morgan Stanley may walk from Reddy Ice deal

NEW YORK (Reuters) - Investment bank Morgan Stanley (MS.N) has threatened to pull its debt financing from the leveraged buyout of Reddy Ice FRZ.N, according to a regulatory filing, amid a fight with the buyer over deal terms.

The maker of packaged ice agreed to be bought by hedge fund GSO Capital Partners in July for $1.1 billion, with Morgan Stanley providing around $700 million of debt financing for the buyout.

According to a regulatory filing on Wednesday, Morgan Stanley believes that GSO Capital changed certain terms without the bank's consent.

The filing says that GSO sought an extension of the go-shop period and delay in the debt marketing schedule, with a shareholder date vote set for October 12. Morgan Stanley appeared to approve of the changes at first, but later objected to them.

Morgan Stanley told GSO that by changing the terms without the bank's consent, GSO had "disabled themselves from satisfying certain conditions to Morgan Stanley's commitment to provide the debt financing," the filing says. Exactly what course Morgan Stanley plans to take is not made clear in the filing.

GSO reiterated its position to Morgan Stanley that the bank's consent was not required in order to enter into the amendment, the filing says.

TheDeal.com was the first to report the dispute.

Possible scenarios include GSO funding the entire deal on its own, both parties walking away and paying a fee, or coming to an agreement.

The disagreement underscores the pressure that the credit squeeze has brought onto banks and leveraged buyout dealmakers. Banks are struggling with syndicating more than $300 billion of leveraged buyout debt, a situation that is straining their relationship with buyers whose deals they've underwritten.

That is especially the case with companies whose financial outlook has worsened in recent months.

A disagreement between the buyers and banks involved in the sale of Home Depot's (HD.N) supply division nearly killed the deal, ending instead in the $10.3 billion transaction being cut by $1.8 billion.