How do arb funds analyze financing risk in leveraged buyouts?

How to answer

Financing risk is the probability that the acquirer fails to secure the debt financing needed to close a leveraged buyout. Arb funds evaluate: (1) whether committed financing is in place (commitment letters from banks); (2) the conditionality of financing commitments (SunGard-style 'certain funds' vs. more conditional commitments); (3) credit market conditions and leveraged loan market health; (4) the acquirer's ability to fund the equity portion; and (5) 'market flex' provisions that allow banks to change loan terms. The 2008 financial crisis demonstrated financing risk when multiple PE deals failed due to frozen credit markets, costing arb funds significantly.

Key idea: Assess commitment letters, credit market conditions, and conditionality of financing.