Thu, 26 Jun 2008 | BUSINESS SALE
Private equity groups are getting into increasing levels of debt when buying new companies, according to a warning from credit rating agency Standard and Poor's.
Leverage multiples, which show the relationship between a company's debts and its core earnings (ebitda), have reached an all time high over the last few months. In March of this year, the figure stood at 5.73, and current deals are reflecting still higher levels with the Royal bank of Scotland, HG Capital and EQT all selling debts at over 7 times ebitda.
The figure is showing no signs of slowing down, with Dutch cable group Casema, which is owned by the Carlyle Group and Providence Equity Partners, reportedly considering a financing package with a leverage multiple of over 8.
Although investors do not seem to be too worried as yet, mainly because loan rates continue to be very favourable, there is some concern among analysts that should interest rates rise or the economy slow down, these firms would struggle to pay back their debts.
Questions are also being raised about whether banks and investors are conducting adequate due diligence and thorough assessments when embarking on high-risk deals. The banks, meanwhile, are attributing the increase in the leverage multiples to a higher proportion of cash-flow companies on the market and low levels of capital expenditure.
In addition, risks are also rising for investors with regard to the way private equity deals are structured. Lawyers have noticed a trend in the legal documentation of recent deals whereby there could be loopholes should the company go into default. Although this has not really been tested yet, owing to the small proportion of defaults over the past few years, companies may be able to resort to the sale of key assets to satisfy creditors, and the creditors themselves may struggle to gain the authority to seize control of a company.
However, with defaults set to rise over the next year, this could all spell conflict between private equity groups and hedge funds over leveraged loan agreements and lead to a drop in private equity activity. So far, the warnings are not being heeded, but with the law firms set to profit from any legal tussles, the 'dirty little secret', as one lawyer has termed it, may be out sooner than anticipated.
The company utilises its trucks and specially designed trailers to undertake the haulage of steel materials, including wide, slit and perforated coil steel; steel blanks, sheets and plates; rolled steel products; and machinery for the steel industry....
A profitable and well-established engineering business dedicated to delivering exceptional precision parts with unparalleled quality. Specialising in complex, high-tolerance components, this company caters to a wide range of industries, including las...
A well-established off licence and convenience store located in the heart of Stoke-on-Trent. This profitable business has been serving the local community since 2003 and boasts a strong, loyal customer base. Specialising in a wide range of wines, bee...
FREEHOLD
14
|
Nov
|
ROL Cruise sets sail on employee ownership journey | BUSINESS SALE
Independent cruise retailer ROL Cruise has marked its upcomi...
14
|
Nov
|
Timber groups merge to carve out new acquisitions | MERGER
Two timber groups have joined together to form a £80 m...
14
|
Nov
|
Swanton Care buys mental health services peer Oaklands Support | BUSINESS SALE
Private equity backed Swanton Care has bought counterpart Oa...
14
|
Nov
|
Swanton Care buys mental health services peer Oaklands Support | BUSINESS SALE
Private equity backed Swanton Care has bought counterpart Oa...
14
|
Nov
|
Timber groups merge to carve out new acquisitions | MERGER
Two timber groups have joined together to form a £80 m...
14
|
Nov
|
ROL Cruise sets sail on employee ownership journey | BUSINESS SALE
Independent cruise retailer ROL Cruise has marked its upcomi...
Business Sale Report is your complete solution to finding great acquisition opportunities.
Join today to receive:
All this and much more, including the latest M&A news and exclusive resources
Please choose your settings for this site below. For more information please read our Cookie Policy
These cookies are necessary for our website to function properly and provide you with access to all features.
These are analytics cookies that help us to improve the way our website works.
These are used to improve the functional performance of the website and make it easier for you to use.