Thursday, June 28, 2007

Kia Motors Pulls Debt Offering

There has been a rash of deals getting pulled off the market lately. Kia is just the latest example:

Kia Motors Corp., South Korea's second-largest automaker, canceled a $500 million bond sale for this week as skittish investors cut demand for riskier assets.


The total amount of debt being taken off the market is increasing:

At least eight companies from Kohlberg Kravis Roberts & Co. in New York to steelmaker Arcelor Mittal in Rotterdam, Netherlands, pulled more than $3 billion of debt sales amid concern that losses from bonds backed by U.S. subprime mortgages will spread to other markets. Caliber Global Investment Ltd., a $908 million hedge fund, said today it will close after losses.

``This may mark a tipping point in the credit cycle,'' said Robert Appleby, who helps manage $2 billion at ADM Capital in Hong Kong. ``If we see a shakeout, it will be a healthy one because it will prevent deals from being priced incorrectly.''


And this is starting to hit the M&A activity that has helped to drive the market higher:

Mergers and acquisitions are increasing at the slowest pace since January. Companies announced about $304 billion of takeovers this month, half the amount in April or May. Leveraged buyouts, where firms use mostly borrowed money to fund acquisitions, account for 21 percent of this year's mergers.


Awhile ago I agree with a statement from Jim Cramer about when the M&A activity would end. He gave five things to look for:

1. Interest rates on the long end going to at least 6%-7%. At that point, I believe it will get too risky.

2. The equity market being closed to the IPOs of the companies that need to be flipped. It's wide open right now.

3. Not one, not two, but maybe three or four, or even five deals going bust. Can't we wait for even one to go belly-up before we get too nervous?

4. Valuations ramping up more. With the S&P 500 selling for about 17.5 times next year's earnings, there is plenty of room to keep buying.

5. Private equity funds running out of money. Very unlikely.


While I don't think pulling an offering for lack of interest or increased caution on the part of lenders would apply as Cramer intended, it still qualifies. We've had a ton of deals pulled over the last week or so.

Here is something to consider: how long does the deal pulling have to go on? My thoughts here are right now we are seeing a backlash caused by the Bear Stearns situation. However, how long will the backlash last? We may simply be in a period when the markets get wary, only to see the recent spate of caution thrown to the wind a bit after the Bear shock wears off. Profit potential has a way of helping people do away with things like covenants.