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There's another wave of problems coming for the buyout sector, the Bank for International Settlements said in a paper
released Friday, arguing that as about $500-billion of loans come due
between now and 2010 the inability to refinance easily will leave many
companies struggling.
For the moment, the market is focused on the inability of buyers to
find loans to do new deals, but private-equity firms will soon find
themselves searching for loans to keep alive the companies they have
already bought in debt-heavy takeovers, the banking umbrella group
said. The original deals were financed by debt with easy terms that's
not going to be available in the current market. Terms like pay-in-kind
(PIK), where companies can avoid paying cash to cover interest, have
gone by the wayside as one major source of demand for leveraged loans
-- securitization vehicles known as collateralized loan obligations --
has almost vanished.
"Riskier second-lien and pay-in-kind loans are attracting little
investor interest, and borrowing costs have risen sharply," the BIS
said. "This, together with the prospect of moderating corporate cash
flows in light of weaker macroeconomic growth, has arguably increased
the default risk for LBO firms, particularly for cyclical firms that
face substantial refinancing needs in the next few years."
This is a grimmer outlook for the buyout crowd than that of ratings
agencies, which put the overall default rate somewhere around 4 per
cent in 2008, the banking group said.
"Default rates for LBO firms, which are highly leveraged, can be
significantly higher than this estimate," the BIS said, citing a
similar trend for buyout deals done during the 1980s takeover binge.
Given what often happens to a private-equity firm's stake in a buyout
target after a default -- a big loss or total wipeout -- the BIS report
is a grim harbinger for investors in buyout funds.
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Winter Mute from toronto, Canada writes: global leverage going down, fewer banks with larger balance sheets
lower global wholesale financial employment as well
so it goes- Posted 04/07/08 at 9:42 AM EST | Alert an Editor | Link to Comment
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