KKR Buyouts to Test the Stretched Credit Market

Wall Street may be facing its worst financial storm in years, but billionaire buyout king Henry Kravis is forging ahead with the biggest deals in U.S. history. Kravis's firm, Kohlberg Kravis Roberts, has made deals for $123 billion in acquisitions this year, more than its three chief rivals combined.

Much as KKR's acquisition of RJR Nabisco came to symbolize the buyout boom of the 1980s, the firm's record $45 billion purchase of Texas utility giant TXU, approved by shareholders last week, exemplifies the freewheeling borrowing that defined the golden age of private equity in the past few years.

Now debt markets are closely watching the latest drama involving KKR -- the attempt to push its massive, debt-laden purchases through the financial system. Wall Street banks need to find investors and hedge funds to back the $36 billion to close the TXU deal, and success is far from certain. If they fail, several analysts said, it could well mark the end of the private-equity frenzy that has transformed the financial world.

"This is probably the high-water mark of the buyout boom of 2007," said Peter Fitzgerald, a former U.S. senator from Illinois whose family has been in the banking industry for decades. "KKR is stretched. The banks that have been backing KKR may be the ones left holding the bag because they have given commitments to fund those buyouts and they have to live up to those commitments."

From his firm's flashy, big-ticket acquisitions to his philanthropy and his status in New York social circles, Kravis, 63, has long played a larger-than-life role on Wall Street.

He practically invented a new sector of Wall Street when he formed his private-equity firm with his cousin George Roberts in 1976. (The other founding partner, Jerome Kohlberg Jr., left KKR in 1987.) He pioneered ways to use massive pools of money to take companies off the stock markets, put them under the control of investors who operate beyond the public eye and sell them later at a profit.

In 1988, KKR stunned the financial world when it agreed to buy RJR Nabisco for a whopping $31.4 billion, even though the junk-bond market, which helped fund buyout deals, was collapsing. The size of the takeover was so extraordinary -- and the burden of the debt KKR took on so immense -- that it became the subject of a best-selling book, "Barbarians at the Gate," which detailed the corporate egos surrounding the deal.

In recent years, KKR has had some notable successes, including a foray into the power business. In 2003, the firm bought privately held ITC Holdings, a power company in Michigan; when it took the company public two years later, KKR made a 500 percent return on its investment.

KKR had required ITC's chief executive, Joe Welch, to put his own money into the company. Welch said he ended up betting his entire life savings. Now he is a millionaire several times over and a believer in KKR. "Of all the people I've ever done business with," Welch said, "the folks at KKR, starting with Henry Kravis, are the most honorable, stick-by-your-word people that I've ever met."

In recent years, KKR has paid more fees to Wall Street banks than any other firm -- about $2 billion since 2000, according to several bankers. Those lucrative fees made bankers eager to help KKR as it reached for ever more expensive and riskier deals.

Now KKR's bankers face their biggest challenge ever -- finding investors for the TXU deal as the credit markets are unraveling.

The Texas utility provides electricity for 2.4 million customers in Texas and has a network of generating stations, including two nuclear-powered and nine coal-fired plants that have been the target of environmentalists.