Investment banker says LBO still alive and has 2 to prove it.

Investment banker says LBO still alive and has 2 to prove it

Despite numerous well-publicized obituaries, the leveraged buyouts which helped fuel the boom times of the 1980s are not dead, Russell Hindin declared last week.

"We're in the process of closing two LBOs, right now," reported the managing director of Hindin/Owen/engelke Inc., a Los Angeles-based investment banking firm. One is a $22 million LBO for an aircraft power transmission manufacturer with annual sales of $75 million. The other is an $8 million LBO for a children's sleepwear manufacturer with annual sales of $28 million.

What is different about today's LBOs from those of the 1980s, Hindin said, is the amount of the leverage. The selling price for today's LBOs four to six times earnings before interest and taxes, he said> whereas, "we had deals in the '80s that were 12 times next year's EBIT]"

To get such deals done in the '80s, Hindin recalled, required risky financing that nonetheless was easy to come by -- bridge loans from securities houses and commercial banks and junk bond issues. Getting financing today no longer is possible by floating a new junk bond issue or obtaining a bridge loan from securities houses or commercial banks, he remarked.

To be sure, commercial banks still are participating in LBOs by providing perhaps 40 percent to 50 percent of the financing package, Hindin said. Thus, the amount of the financing provided by commercial banks in the form of solely senior debt for LBOs today is based on two to three times EBIT, he said, and the banks are requiring more equity than previously.

Commercial banks also are much tougher today in what loans are being renewed and kept, Hindin said, a reaction to sterner banking regulators who are requiring larger reserves be established for more loans now deemed marginal. To avoid being tagged by regulators to increase reserves for more loans now considered dubious, banks are pushing out the door "lots of companies" that have been customers, he said.

"The banks are like Santa Claus in reverse: They don't want to give, but they do want to get rid of subpar loans."

Consequently, in the current climate of subdued LBO transactions, Hindin in finding a pick-up in another aspect of his business: helping troubled companies refinance bank loans that are coming due. He, for example, is trying this month to help a family-owned mini-conglomerate to obtain a new, 72-month, $7 million term loan to repay the existing loan and provide additional funds to the company.

To get a commercial lender to provide the refinancing, though, will require the company to establish effective financial controls (to replace its poor ones) and to slash high overhead, Hindin indicated.