The "highly confident letter" was a financing tool created by

investment bank Investment is the dedication of money to purchase of an asset to attain an increase in value over a period of time. Investment requires a sacrifice of some present asset, such as time, money, or effort. In finance, the purpose of investing is ...

ers at

Drexel Burnham Lambert Drexel Burnham Lambert was an American multinational investment bank that was forced into bankruptcy in 1990 due to its involvement in illegal activities in the junk bond market, driven by senior executive Michael Milken. At its height, it was ...

, dominated by

Michael Milken Michael Robert Milken (born July 4, 1946) is an American financier. He is known for his role in the development of the market for high-yield bonds ("junk bonds"), and his conviction and sentence following a guilty plea on felony charges for viol ...

, in the 1980s. Its objective was to enable

corporate raider A corporation is an organization—usually a group of people or a company—authorized by the state to act as a single entity (a legal entity recognized by private and public law "born out of statute"; a legal person in legal context) and r ...

s to launch

leveraged buyout A leveraged buyout (LBO) is one company's acquisition of another company using a significant amount of borrowed money ( leverage) to meet the cost of acquisition. The assets of the company being acquired are often used as collateral for the loa ...

(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 Celian Icahn (; born February 16, 1936) is an American financier. He is the founder and controlling shareholder of Icahn Enterprises, a public company and diversified conglomerate holding company based in Sunny Isles Beach. Icahn takes l ...

's attempt to take ownership of

Phillips 66 The Phillips 66 Company is an American multinational energy company headquartered in Westchase, Houston, Texas. Its name, dating back to 1927 as a trademark of the Phillips Petroleum Company, helped ground the newly reconfigured Phillips 66. T ...

. The conventional wisdom was that due to Icahn's reputation as a takeover artist combined with the

junk bond In finance, a high-yield bond (non-investment-grade bond, speculative-grade bond, or junk bond) is a bond that is rated below investment grade by credit rating agencies. These bonds have a higher risk of default or other adverse credit event ...

'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 Leon David Black (born July 31, 1951) is an American investor and the co-founder and former-CEO of the private equity firm Apollo Global Management. Black also served as the chairman of The Museum of Modern Art (MoMA) in New York City from J ...

, 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 Underwriting (UW) services are provided by some large financial institutions, such as banks, insurance companies and investment houses, whereby they guarantee payment in case of damage or financial loss and accept the financial risk for liabili ...

of the debt, would not actually raise the money, but promised that it could. 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 did not 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, and given Drexel's reputation it was considered as good as cash for corporate raiders in the 1980s.

References

* Stewart, James B. '' Den of Thieves''. New York: Simon & Schuster, 1991. . * Kornbluth, Jesse. ''Highly Confident.'' New York: William Morrow, 1991. {{ISBN, 0-688-10937-3. Banking Private equity