It's all part of the race to have the most risky capital structure possible during boomtimes.Perhaps this ensures that the business cycle and the associated credit cycle will never be repealed. However, when it all starts to go bad and threaten the general prosperity, one has to wonder if there isn't more to be done to ... add dampeners on the way up, so that the way down might be more easily managed.
Here are two ad-hoc bits that suggest that "private equity" may be compounding economic risks in the cycle, while mostly adding value to themselves. It's all part of the race to have the most risky capital structure possible during boomtimes:
The average multiple private-equity firms have been paying has been mostly on the rise the past four years, though there was a small dip from 2005 to 2006. In 2003, buyout shops paid an average of about nine times Ebitda [when interest rates we sooo low]. This year, private-equity firms are paying an average of 12.4 times Ebitda, according to FactSet MergerStat [despite interest rates being much higher]. - DealJournal
In a new study to be released tomorrow ... Fitch Ratings says bondholders may face a bigger threat in deals cropping up more and more where companies take on debt to make big payments to shareholders. -DealJournal
The elixir, the calm before the storm [a fed rate cut - kerosene on the flames?]:
Banks are so loose these days when it comes to lending that even many investment bankers are scratching their heads. Here’s a statistic that may help explain: not a single borrower in the so-called leveraged-loan market has defaulted in the past six months, a streak so long it’s happened only once before. -DJournal
[long, but worth it] ... In a recent research report, Standard & Poor's Managing Director Diane Vazza pointed out that for the first time, more than half of Standard & Poor's ratings on U.S. corporate entities, including financial services companies, now fall below investment grade (see " U.S. Ratings Distribution: A Speculative-Grade World," published Aug. 1, 2007, on RatingsDirect, the real-time Web-based source for Standard & Poor's credit ratings, research, and risk analysis). For industrial companies alone, this percentage is well beyond 50% and has been increasing steadily for years.
In an ongoing series of commentaries titled " Special Report: The Leveraging of America," our Industrials analysts have documented this trend in depth, highlighting the role that LBOs, leveraged mergers, and other forms of recapitalization have played in increasing balance sheet leverage and reducing credit quality among U.S. industrial companies. We have believed for some time that this leverage-driven decline in ratings was foreshadowing a likely increase in corporate defaults. This scenario has not materialized to date, in part because the extraordinary liquidity in the market has cushioned financial risk affecting leveraged companies. Our ratings in the leveraged sector fully reflect the likelihood that such liquidity conditions are not permanent, so the market should not be surprised if defaults among leveraged companies begin to rise.
Also,
Something borrowed, something blue, or Gilding the Lily with style:
LBO for highly leveraged companies:
Levering Up: What The Sallie Mae Deal Tells Us About The Financial Sector [DealBreaker]
and:
UBS’s Six-Week Sallie Mae Payday Tops $50 Million
