Wall Street seeks protection in future LBO deals

By Michael Flaherty

NEW YORK (Reuters) - Private equity deals are headed for an overhaul as Wall Street investment banks worry about getting caught in another failed leveraged buyout or a debt-offering dud.

After raking in more than $30 billion in private equity fees on more than $1 trillion worth of acquisitions in the last two years, banks got hung up not only on leveraged buyouts that fell apart, but also on deals that debt buyers spurned.

For example, Merrill Lynch & Co Inc's (MER.N: Quote, Profile, Research, Stock Buzz) leveraged loan portfolio took a nearly $1 billion hit in the third quarter, while Goldman Sachs Group Inc (GS.N: Quote, Profile, Research, Stock Buzz) took a $1.71 billion write-down on its portfolio.

With the credit crunch still taking its toll across financial markets, bankers want to avoid getting caught naked on the next private equity bid.

Such deals are no longer about trust, a handshake and a loosely worded merger agreement. Rather, deal documents will be heavy with airtight language and protections for all parties against material changes, lawyers say.

While no one can say when leveraged buyouts will pick up again, dealmakers say one thing is clear: Future buyout agreements will bear little resemblance to the ones inked during the private equity industry's three-year takeover spree.

In fact, experts say the LBOs of tomorrow will bring back many elements of the past, including financing conditions that make it easier for banks to withdraw from a deal.

Conditions that give suddenly skittish buyers an easy exit are out, while bank-friendly terms and more-specific clauses on material adverse changes are in.