Thursday, March 29, 2012

Carlyle Bulges PQ Corp's Debt

Standard & Poors rated PQ Corporation's planned debt refinancing and it reveals much about private equity underwriter's financial tight rope walking. Consider the following points:

  • Adjusted debt to EBITDA remained high at about 7.2x as of Dec. 31, 2011, higher than our expectations at the rating of adjusted debt to EBITDA of about 6x
  • The company has little cushion at the current ratings for even temporary declines in earnings that could increase leverage levels.
  • In addition, we believe high levels of debt maturing in 2014 would be an increasing credit risk if business conditions deteriorate, despite the immediate expected improvement in the company's debt maturity profile because of the proposed transaction.
  • Our ratings on PQ Corp. reflect the company's "highly leveraged" financial profile (as our criteria define the term), including very aggressive financial policies; and its "fair" business risk profile.
  • PQ Corp.'s highly leveraged financial profile and ownership constrain its ratings. The Carlyle Group is the majority owner of PQ, with financial policies that we characterize as very aggressive.
  • We view large debt maturities of over $1 billion in 2014 as a credit risk and expect that management will be proactive in refinancing these maturities.
Proactive in refinancing?  Carlyle shifted $200 million from 2013 into 2014, increasing the bulge in the belly of the snake.  Multiply Carlyle's aggressive financial policies times 1,000 and systemic risk rears its ugly head.