For The Market To Move, Something's Gotta Give

September 10, 2007

The time has arrived, Labor Day has come and gone, and the leveraged finance markets are looking to get moving again. Investors insist they have money to spend if the price is right, but will bankers be willing to eat some of the fees they've earned?

It looks as if that may be what needs to happen to get the markets churning again, at least to some extent, though banks are clamoring for other options, as Matt Sheahan reports this week. (See story, page 1).

An amorous reprieve from the likes of KKR won't be arriving, that much has been made clear. And as I've said before, it's not the private equity sponsors' responsibility to bail banks out once they've signed the dotted line.

Take a look at the chart from Dealogic on the opposite page and you'll see the millions in fees some of the biggest spenders in private equity have paid some of the top investment banks in the leveraged loan space so far this year (as well as the totals those banks have earned on loan deals and total revenue for all loan transactions). And this doesn't include additional fees for high yield bond transactions.

In the world of investment banking, millions don't cause the batting of an eye; still, these sums are not paltry by any stretch. And one could call it easy money, considering how comfortably deals slipped into the hands of investors until recently.

The banks that have underwritten large numbers of these deals, agreeing to terms they can no longer push through, should step up to the plate and set an example.

Banks like JPMorgan, Citi, Deutsche Bank and Goldman Sachs should take the first steps to get the market running again, even if it means losing out in the short term. In the long run, a functioning market benefits everyone; no one wins when the deal machine stands still. And at the end of the day, investors do deserve to be paid for the risk they are taking with some of these credits. Isn't higher risk, higher reward the way it's supposed to work?

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