Merge, pile on debt, then we’ll come to rescue

NEW JERSEY: Investment banking (I-banking) is a wonderful business. First, persuasive bankers in New York and London promote takeovers, earning millions of dollars for their advice. To complete the deals, investment firms load the companies with debt, taking more fees for selling the junk bonds or making the interim loans necessary. Finally, when companies collapse under the debt burden, the bankers profit again.

They advise corporations on how to avoid or get out of bankruptcy and they trade the companies’ distressed bonds and loans. Today, even as they continue to bask in the latest takeover boom — $2.3 trillion in global deals have been announced so far this year — investment firms are cynically preparing for the bust they know must come. New York-based firms Goldman Sachs Group and Morgan Stanley have beefed up their distressed-debt groups recently. So has Amsterdam’s ABN Amro Holding NV, which is the target of two takeover bids.

Blackstone Group LP, which manages $33 billion in funds that buy companies largely with borrowed money, is starting a corporate salvaging group in London. Does Blackstone have any of the companies it bought in mind? While hard evidence of corporate distress is scarce at the moment, the rapid pace of debt accumulation can only mean trouble. Leveraged buyouts totaling $446 billion have been proposed so far this year following a record $702 billion for all of 2006.

Investors have a great appetite for high-yield, high-risk US corporate bonds, many of which are sold to finance takeovers. The yield on junk bonds is just 2.42 percentage points higher on average than the yield on US Treasury bonds, according to a Merrill Lynch index that tracks this spread.