Huntsman settlement could strain financing

NEW YORK (Reuters) - Deal financing could become more difficult to obtain and may contain more onerous terms, as banks seek to avoid the kind of pricey legal settlement paid to chemical company Huntsman Corp (HUN.N).

Huntsman will receive $1.73 billion in cash and financing under a settlement with Credit Suisse (CSGN.VX) and Deutsche Bank (DBKGn.DE), ending a long and bitter battle over the collapse of a $6.5 billion buyout of the chemical company.

"Banks will be very concerned about the (financing) commitments they give," said Morton Pierce, chairman of law firm Dewey & LeBoeuf's mergers and acquisitions group. "You are going to see tighter conditions around the commitments" following the settlement.

Credit Suisse and Deutsche were lenders in a 2007 buyout of Huntsman led by private equity firm Apollo Management LP APOLO.UL. The deal was one in a string of high-profile debt-laden buyouts that soured in 2007 and 2008.

The banks' increased caution could be another nail in the coffin of the leveraged buyout market, which has been in a swoon since the onset of the credit crisis in mid-2007.

After the settlement, banks could look to protect themselves by writing clauses into financing that limit their liability if a deal falls apart, including tighter material adverse change conditions.

Banks "are going to want to have much clearer language in any kind of commitment letter that they have the right to call things off if they have any doubt about the solvency of the acquired firm," said Columbia Law School Professor John Coffee.

Coffee said bank concerns about potential liability could make it even harder to close deals.

"They may not fund a potential transaction because they don't trust that they have the ability to escape liability, or they may have language that makes it impossible to force them to close. So this is more likely to produce deals that blow up," he said.

TEXAS-SIZED FEARS

Joel Greenberg, co-chair of law firm Kaye Scholer's corporate & finance department, said the settlement was a cautionary note for banks, which need to be very careful about how they behave if a deal looks like it is going to crater.

Greenberg suggested that banks should consider making targets a party in financing commitments.

If such an agreement was reached sellers would be able to enforce it, he said. But banks could build in limits on possible damages and suggest jurisdictions for trials or arbitration.

That could result in higher reverse break-up fees -- paid by a buyer who walks away from a deal -- or other concessions to targets, he said.

Deals could also be made with the potential buyers that would assign liability on them, rather than the banks, if a deal goes south.

Several lawyers suggested that banks should look to write their commitment letters to ensure that cases over soured deals would be heard in business-friendly jurisdictions like New York or Delaware.

"Nothing strikes terror into the heart of a bank than the process of facing a Texas jury," said Columbia's Coffee.

The Huntsman settlement is a holdover from the highly leveraged deals carried out before the recent downturn, but it could have ramifications going forward, making banks even more skittish about financing deals.

"When you have a settlement like this in a bank market that's already very cautious and conservative, its only going to add to that caution and conservatism," said Dewey & LeBoeuf's Pierce.

(Reporting by Michael Erman; Editing by Richard Chang)