Highly confident letter
Encyclopedia
The "highly confident letter" was a financing tool created by investment bankers at Drexel Burnham Lambert
, dominated by Michael Milken
, in the 1980s. Its objective was to enable corporate raiders to launch leveraged buyout
(LBO) offers without the debt component of their financing package fully in place.
The letter was first crafted in 1983 for use in Carl Icahn
's attempt to take ownership of Phillips 66
. The conventional wisdom was that due to Icahn's reputation as a takeover artist combined with the Junk Bond's perception as below investment grade paper, no bank would want to commit the cash necessary to augment any bonds Drexel would raise. Leon Black, Drexel's lead investment banker on the deal, proposed that Drexel write a letter advising the banks that it was "highly confident" that it would be able to raise the required debt in time to fulfill Icahn's obligations. A large portion of the debt financing would be composed of junk bonds raised by Milken. In essence, Drexel, as principal underwriter of the debt, wouldn't actually raise the money, but promised that it would raise it.
The highly confident letter had no legal status. Nonetheless, Drexel, or more precisely, Milken, had a reputation for being able to make markets for any bonds it sold. Thus, its ability to raise the huge amounts of leverage that were required for LBOs was widely accepted as given in the markets during those days. Drexel's senior management saw this as a win-win situation for the firm. If it worked, it would be a valuable tool in future deals; if it didn't, Drexel wouldn't suffer any significant losses. As it turned out, Icahn didn't actually win control of Phillips, but made enough of a profit that the deal was considered an unqualified success for Drexel. The highly confident letter was used on several more occasions over the years.
Drexel Burnham Lambert
Drexel Burnham Lambert was a major Wall Street investment banking firm, which first rose to prominence and then was forced into bankruptcy in February 1990 by its involvement in illegal activities in the junk bond market, driven by Drexel employee Michael Milken. At its height, it was the...
, dominated by Michael Milken
Michael Milken
Michael Robert Milken is an American business magnate, financier, and philanthropist noted for his role in the development of the market for high-yield bonds during the 1970s and 1980s, for his 1990 guilty plea to felony charges for violating US securities laws, and for his funding of medical...
, in the 1980s. Its objective was to enable corporate raiders to launch leveraged buyout
Leveraged buyout
A leveraged buyout occurs when an investor, typically financial sponsor, acquires a controlling interest in a company's equity and where a significant percentage of the purchase price is financed through leverage...
(LBO) offers without the debt component of their financing package fully in place.
The letter was first crafted in 1983 for use in Carl Icahn
Carl Icahn
Carl Celian Icahn is an American business magnate and investor.-Biography:Icahn was raised in Far Rockaway, Queens, New York City, where he attended Far Rockaway High School. His father was a cantor, his mother was a schoolteacher...
's attempt to take ownership of Phillips 66
Phillips 66
Phillips 66 is a brand of gasoline and service station in the U.S. It is owned by the ConocoPhillips Company.Phillips 66 will also be the name of the future downstream company created when ConocoPhillips repositions its integrated assets and businesses into two independent, publicly-traded...
. The conventional wisdom was that due to Icahn's reputation as a takeover artist combined with the Junk Bond's perception as below investment grade paper, no bank would want to commit the cash necessary to augment any bonds Drexel would raise. Leon Black, Drexel's lead investment banker on the deal, proposed that Drexel write a letter advising the banks that it was "highly confident" that it would be able to raise the required debt in time to fulfill Icahn's obligations. A large portion of the debt financing would be composed of junk bonds raised by Milken. In essence, Drexel, as principal underwriter of the debt, wouldn't actually raise the money, but promised that it would raise it.
The highly confident letter had no legal status. Nonetheless, Drexel, or more precisely, Milken, had a reputation for being able to make markets for any bonds it sold. Thus, its ability to raise the huge amounts of leverage that were required for LBOs was widely accepted as given in the markets during those days. Drexel's senior management saw this as a win-win situation for the firm. If it worked, it would be a valuable tool in future deals; if it didn't, Drexel wouldn't suffer any significant losses. As it turned out, Icahn didn't actually win control of Phillips, but made enough of a profit that the deal was considered an unqualified success for Drexel. The highly confident letter was used on several more occasions over the years.