Buyout Market
Debt Bankers Predict Trouble in Buyout Market
Leveraged finance bankers predict that half of all private equity buyouts that have been completed within the last three years will struggle. The head of restructuring at JP Morgan, Peter Jaffe, said that because companies have been overleveraged, around half of private equity buyouts made in the last three years will run into trouble. He believes that buyouts need to be deleveraged because there is a lack of credit available in the market for buyout deals.Speakers at the Debt Brief Europe conference agreed that there will likely be an unparalleled amount of trouble for private equity-owned companies.
“If anybody who runs an investment portfolio tells you they have no problems in it they’re a bare-faced liar,” said Ryan McGovern, investment director at Nomura Mezzanine, a Japanese debt provider. “One of the problems is everyone is looking into a black hole of economic morass.”A discouraging estimate came from rating provider, Moody's Investment Services, which expects the 5 year global high-yield default rate to rise from 10.2% in September to 35.1% in 2013, more than tripling in just five years. This coincides with an increase in the number of private equity-backed companies breaking contract, asking for a waiver or rearranging their debt structure.
S&P found that in the 12 months ended Oct. 30, there was a 100% increase in covenant breaches, waiver requests or related restructurings among speculative-grade industrial companies in Europe, compared with the prior 12-months. These companies are also running into difficulties more quickly, with the time from financing to experiencing problems with covenant tests decreasing considerably in the past two years when compared with 2006, according to S&P.The estimates given by participants in the Debt Brief Europe conference added to recent pessimism over the future of private equity, especially in regards to buyouts.
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