Sunday, December 16, 2012

PEU's Borrow More on Deals

WSJ reported private equity deals returned to high debt levels seen before the financial crisis:

Private-equity firms are using almost as much debt to fund acquisitions as they did before the financial crisis, as return-hungry investors rush to buy bonds and loans backing those takeovers.

The rise in borrowed money, or leverage, heralds the possibility of juicy returns for buyout groups. Ominously, the surge also brings back memories of the last credit binge around six years ago, which saddled dozens of companies with huge levels of debt. Some companies laden with debt by private-equity firms in the mid 2000s foundered during the recession.

The Carlyle Group just lost its twelfth affiliate, LifeCare Hospitals, to bankruptcy for the reason cited below.

But the more a business borrows, the more it must spend to make debt payments, leading some to default when earnings decline.

Leverage stands at near frothy levels:

In the past six months, the percentage (of PEU equity) has fallen to 33%, according to Thomson Reuters, close to the 31% average in 2006 and the 30% average in 2007.

Recent deals have been done at 30% or less.  Are loan covenants easy again?  Is Carlyle co-founder David Rubenstein tempted again, unable to say no to easy money? Carlyle will put down a mere 25% on DuPont Performance Coatings, financing 75%.