LBO Debt
The Worrying Debt Facing 10 Large LBO's
Buyout deals financed between 2005-2007 are "drowning in debt" and struggling to refinance in this economic climate. Moody's Investors Service has tracked the performance and finances of companies owned by the top 14 buyouts firms as well as non-mega buyouts in its report, "$640 Billion & 640 Days Later: How Companies Sponsored by Big Private Equity Have Performed During the U.S. Recession" and found that six are considered distressed and four have defaulted. I've discussed this mounting pile of debt previously when debating the so-called "comeback" of private equity, and I still believe it is an obstacle facing the industry that must be addressed before the bigger buyout firms can execute new deals consistently at a pre-recession level. Buyout firms may have been correct to continue to use borrowed capital to keep their failing portfolio companies afloat in the crisis, but Moody's may be correct in suggesting that several large investments are due to default anyway. I have a suspicion that the Moody's estimate may be exaggerated to some extent but there is no denying the debt issue.
It appears these deals were financed with the hopes that the recession would be shorter or that the buyout management would be able to turnaround the company enough to scrape by in the crisis. However, most of these firms are consistently under-performing and hope for returning to profitability is dwindling. An important note is that very few of the companies held by private equity firms received capital infusions to reduce their debt, those buyouts injecting capital were likely trying to avoid covenant violations.
The report found that deals by Cerberus Capital Management LP and Apollo Management Lp have performed the worst among their peers. Four of Cerberus' six buyouts are in distress or in default, and about two-thirds of Apollo's companies are in equally dire straits. However, these firms have focused more closely on distressed targets than their peers covered by Moody's, including Kohlberg Kravis Roberts & Co., Blackstone Group LP (NYSE:BX), Welsh, Carson, Anderson & Stowe and Madison Dearborn Partners. Additionally, the revelation about problems in Apollo's and Cerberus' portfolios was already well known thanks to the high-profile bankruptcies of Cerberus' Chrysler LLC and Apollo's Linens 'n Things Inc.
"These mega-deals continue to under-perform," said John Rogers, Moody's senior vice president. "As with Harrah's, the announced debt exchange at the former TXU is only the first step in addressing its over-leveraged capital structure."
Only three of the biggest 10 LBOs remain above the distress level, according to Moody's:
- HCA Inc., bought by a private equity consortium for $35.3 billion;
- First Data Corp., another "Large Club" LBO, acquired for $29 billion; and
- Hertz Global Holdings Inc. (NYSE:HTZ), bought out by a private equity consortium led by Carlyle Group for $15 billion in 2005. Source
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Tags: LBO debt, leveraged buyouts, leverage, buyout, private equity deals, debt, restructuring, refinancing
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