GM's Divorce From Allison Gets a Flat

How bad will the subprime mess get? Its tendrils are creeping out in many ways. They're even starting to have an impact on industries unrelated to housing.

This morning, The Wall Street Journal reported that the deal between General Motors (NYSE:GM) and the private capital group putting together a leveraged buyout of the automaker's Allison Transmission division is on hold. Seems they're having difficulty putting together investors willing to finance it. Though the project is reported as "highly likely" to still get done, the delay highlights the growing wariness of investors backing private equity deals. According to Bloomberg, at least 20 deals have been disrupted in the past month.

Wall Street investment banks like Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) reportedly hold some $11 billion in high-yield bonds they can't sell to investors, according to Bear Stearns data. Investors are leery of taking hold of such high-risk debt after what's happened in the subprime mortgage business.

Certainly, good deals will continue to be made. For example, Cerberus is moving to make a $4 billion purchase of United Rentals (NYSE:URI), making it the third equipment rental company to be bought out over the past year.

It's the average transactions that may have a problem as financing grows more expensive and investors grow leery. With credit spreads widening, the cost of debt is rising for acquisitive borrowers. All this means that more high-risk deals will either end up on the back burner or simply not happen at all.

The GM-Allison deal is still on track for completion in the third quarter, but the underwriters themselves may have to take on more of the debt if they can't sell it to investors.

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Fool contributor Rich Duprey does not have a financial position in any of the stocks mentioned in this article. You can see his holdings here. The Motley Fool has a disclosure policy.