LBOs are back - if you buy from a bank

Imagine a deal where the buyer only has to put up 29% of the purchase price and the new company ends up with debt equal close to eight times earnings. Sounds like a throwback to the days when the world was awash in cheap money and Blackstone boss Stephen Schwarzman was booking Rod Stewart for his birthday parties.

In fact, those are the terms accompanying Barclays' sale of its iShares business to British private equity firm CVC, which was announced Thursday. Cincinnati bank Fifth Third did something similar for buyout group Advent International just two weeks earlier with the sale of its credit processing business. Leveraged buyouts look to be back – but only when the lender is the seller.

Take the iShares deal. Barclays is selling the US purveyor of exchange-traded funds for $4.37bn. But CVC is only putting up $1bn of that in cash. Barclays, which owns iShares through its money management arm, is lending CVC $3.1bn, including $1.7bn of senior debt and another $1.1bn in vendor financing.

That means leverage will comprise 71% of iShares' enterprise value. Moreover, the debt load will represent around 7.5 times the $411m of earnings before interest, tax, depreciation and amortization that iShares reported for last year. These are the kinds of debt levels not seen since the credit crisis hit more than a year ago.

So does this mark a return to the halcyon days of private equity? Don't bet on it. The sale of the iShares business bolsters Barclays' capital ratios across the board. Combined with some other measures the London-based bank has undertaken to avoid accepting UK government funds and the strings attached, Barclays says the iShares deal will increase its Tier 1 capital ratio to about 10.3%.

Fifth Third's leveraged sale of its processing business boosted its capital ratio by nearly a full percentage point to a pro forma 11.5%. It's hard to believe that Barclays or any of its competitors would offer such terms to just any old private equity firm. As with Fifth Third's foray into leveraged lending, there's more at stake in these deals than mere banking fees.