DEALTALK-Tribune may be tip of bankruptcy iceberg among LBOs

By Megan Davies and Karen Brettell

NEW YORK, Dec 8 (Reuters) - Debt-laden companies bought with cheap money during the private equity boom are under increasing stress as the U.S. economy worsens, and more are expected to follow media company Tribune into bankruptcy.

The collapse of the publisher of the Chicago Tribune and Los Angeles Times is the biggest yet among companies taken private in the leveraged buyout boom that ground to a halt in mid-2007, but it's unlikely to be the last.

While not a private equity deal, the buyout of Tribune by employees and real estate mogul Sam Zell was one of those that epitomized the credit boom. The company took on about $8 billion of additional debt when it went private.

"This process of deleveraging America, whether financial institutions or Tribune, will be a long, slow and painful process," said Duke University Law School Professor James Cox. "That's what's going to prolong this recession."

He said there were particular concerns over deals in industries whose fortunes rise and fall with the economy and those which may be headed for extinction.

"There are a lot of other deals, transactions, out there that tend to do well when the economy is expanding but really hit the floor when it's not," said Cox.

Retailers have been particularly hard hit. Linens 'n Things, bought by New York buyout firm Apollo Management, filed for bankruptcy in May, and department store chain Mervyns Holdings LLC, previously acquired by Cerberus Capital Management LP and Sun Capital Partners, announced plans to liquidate in October.

"I think undoubtedly we will see more bankruptcies of private equity-backed firms, but also regular operating firms too," said Josh Lerner, professor specializing in private equity at Harvard Business School. "What's harder is to say whether the private equity ones are more likely to (fail)."

He cited a study released earlier in the year showing that a small percentage of deals over the history of the private equity industry worldwide have ended in a bankruptcy or a distressed reorganization. Lerner led the research team on the study.

However, failure rates appear to be far greater for megadeals concluded at the peak of buyout booms, Lerner said.

He cited a 1993 study which concluded that of the 66 largest deals done at the peak of the 1980s buyout boom, 38 percent experienced financial distress and 27 percent defaulted on debt repayments, often in conjunction with a Chapter 11 filing.

Loose loan covenants could help some private equity firms stave off trouble, although it is debatable whether these just prolong the pain. These covenant-light deals, popular during the boom, lack the traditional restrictions on borrowers, while pay-in-kind deals, also called PIK-Toggle, allow firms to defer interest payments in favor of issuing more debt.

UNDER STRESS

A number of private equity firms' portfolio companies are trading at distressed levels in the credit default swap market, indicating concern in the market about their future.

Harrah's Entertainment, which operates nearly 40 casinos across the United States, was bought by Apollo Global Management and TPG Capital LP [TPG.UL] at the peak of the leveraged buyout bubble. Now Harrah's has put most of its development plans on hold as it grapples with a soft economy and a heavy debt load.