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Global Credit Research - 27 Nov 2012
New York, November 27, 2012 -- Private equity firms have been exploiting investors' willingness
to lend to speculative-grade companies, Moody's Investors
Service says in a new report, "It's Risk-On for Private
Equity." Higher yields are drawing investors to riskier structures
at a time when interest rates remain at historical lows as the Fed seeks
to stimulate the US economy.
"The wide availability of credit for even the lowest-rated
US companies is presenting an opportunity for private equity firms to
extract dividends, exit their investments and increase financial
flexibility at sponsored companies," says Senior Vice President
Christina Padgett.
Covenant-lite loans, secondary buyouts and debt-funded
dividend recaps at high leverage have all been prevalent amid this year's
strong high-yield bond issuance, Padgett says. Indeed,
covenant-lite has become the "transaction de jour"
as a consequence of strong demand in the syndicated loan market.
And private equity is present in almost 90% of all new cov-lite
deals.
"Cov-lite loans provide excess flexibility to sponsored companies,
leaving them free to take risks and postpone default," Padgett
says. "This may leave less recovery value for subordinated
debtholders, who experience a higher proportion of losses in a default."
In addition, bondholders cannot rely on bank debt to govern cov-lite
issuers' financial policies, she notes, as their interests
are often not aligned.
Secondary buyouts have become increasingly prevalent in the past few years,
a trend Moody's expects to continue as long as private equity is
under pressure to invest available capital and, coincidentally,
to sell existing investments and generate returns. And leverage
is rising, with recent buyouts at Party City and AMC, for
example, occurring at more than 7 times.
Similarly, debt-funded dividend recaps are occurring at higher
leverage, with levels of more than 6 times matching those seen before
the financial crisis, a further sign of investors' willingness
to take on more risk for higher returns.
Moody's research subscribers can access this report at http://www.moodys.com/research/Its-Risk-On-for-Private-Equity--PBC_147409.
***
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Corporate Finance Group
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Moody's: Private Equity Firms Are Raising Risks for Creditors
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