What bank would turn up its nose at the chance to finance Europe's largest buyout and the opportunity to earn handsome fees? Certainly not the eight lenders Kohlberg Kravis Roberts & Co. and its Italian partner, Stefano Pessina, brought in to finance their £12.1 billion ($23.7 billion) purchase of British pharmaceuticals wholesaler and retail druggist Alliance Boots plc. By the time the deal closed in July 2007, Bank of America Corp., Barclays plc, UniCredit SpA, Citigroup Inc., Deutsche Bank AG, J.P. Morgan Chase & Co., Merrill Lynch & Co. and Royal Bank of Scotland Group plc had put in £8.2 billion of loans plus an £820 million revolving credit facility for working capital.

Their timing could not have been worse. Weeks after the deal closed, credit markets seized up. Alliance Boots' debt syndication was large and, given Boots' brand name recognition, extremely sensitive. While only too happy to participate in the high-profile transaction, however, each bank would be left holding a piece of it for a long time.

True, about £750 million of mezzanine debt was syndicated as early as September, but more than £6 billion of debt, including £5.05 billion of senior debt, remained unsold. By the first quarter of 2008, other deals, notably the £1.7 billion take-private of U.K. waste manager Biffa plc, were breezing by, and on terms far more comfortable to both lenders and debt investors. After Biffa closed in April, underwritten by five banks and with a debt package of just £1.1 billion, reports said Alliance Boots' mezzanine tranche was completely covered at par and senior debt was oversubscribed.

Even then, only about £100 million was taken up by institutions.

Through May the markets swirled with speculation. Some banks were thought to be unhappy at the low price on offer, others ready to take whatever they could get. The Financial Times reported in late May that Goldman, Sachs & Co.'s mezzanine fund had stepped in to buy £650 million of the second-lien debt tranche at 85% of face value.

Deutsche Bank, the agent for the syndication, didn't return calls for comment, but a source close to the market says buyers had agreed to take about £2.5 billion of senior debt in late May at 91% of par, though a further £2.5 billion of Term Loan B remained unsold. Not until late June 2008 was the banking consortium reported to have launched the sale of a further £650 million at 92% of par. The sale, if successful, would bring the total to £3.05 billion and end the Alliance Boots debt sell-off for the time-being. Barclays has not written down the value of the loan, and UniCredit decided not to sell, but other consortium members had agreed to the writedowns.

A £1 billion second lien loan and a £750 million mezzanine loan have also been placed, according to Reuters.

Buyers of Alliance Boots debt have not been disclosed, although private equity firms such as Apollo Management LP, Blackstone Group LP and TPG Capital likely played a role, too.

The banks' woes don't seem to faze either KKR or Pessina, now executive chairman at Alliance Boots. At the group's recent results conference, where Pessina announced a 6.3% increase in revenue, to £17.9 billion, and a 17.8% jump in Ebitda, to £1.12 billion, Pessina shrugged off the financing issue.

"The debt is not our problem; it's the problem of the banks," he says. "We are very sorry for the banks, but it has not kept us awake at night."

That's a little disingenuous, perhaps, considering that the pro forma operating profit of £854 million was almost exactly matched by the group's funding costs of £853 million. Still, business is growing, and management is confident the company will continue servicing its debt. That's all the banks could hope for, so as not to keep them awake at night.

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