Big Lawsuits Finally Hit The Private Equity World

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It is surprising that it took so long. A private equity firm is finally suing a bank that walked on a big transaction. It is only the beginning.

Wachovia (WB) skipped out on its obligation to fund the Providence Equity buy-out of Clear Channel’s (CCU) TV stations. The banks reasoning was perverse. The deal terms had changed so it had the right to exit. But, the change in terms made the transaction better for the bank.

Legal eagles at the money center banks have decided that it is wiser to pay a break-up fee than to take more LBO debt onto their balance sheets. They cannot syndicate this debt to other institutions because of fear that too much leverage on the companies’ balance sheets could cause defaults in a recession.

The argument has the benefit of being true, but it does no take the banks away from their obligations.

On the scales of their reasoning the banks clearly think that the litigation costs outweigh the costs of more write-offs and having to raise more capital. It is the kind of theory that is true until it is not.

Banks now may face an onslaught of suits over broken deals. They will lose some of them and find that the price of breaking their word may be more than they imagined.

Douglas A. McIntyre