Sunday, April 13, 2014

Debt PEUniverse Orbits Back to 2007

Did global efforts to save our financial system in 2008 put the world at more risk five years later?  That's the concern of Bill White, former chief economist of the Bank for International Settlements.  ZeroHedge reported:

"It all looks and feels like 2007. And frankly, I think it’s worse than 2007, because then, it was a problem of the developed economies. But in the past five years, all the emerging economies have imported our ultra-low policy rates and have seen their debt levels rise. The emerging economies have morphed from being a part of the solution to being a part of the problem.

When you talk about crisis resolution, it’s about attacking the fundamental problems that got you into the trouble in the first place. And the fundamental problem we are still facing is excessive debt. Not excessive public debt, mind you, but excessive debt in the private and public sectors. To resolve that, you need restructurings and write-offs."

Excessive private debt has that 2007 feel with the return of covenant lite borrowings.  FT reported:

Dollar-denominated cov-lite loans to US and European companies reached a record $260bn in 2013, or 57 per cent of the total volume, and 69 per cent more than in 2007.

This has prompted the Federal Reserve and the Office of the Comptroller of the Currency to warn that the lack of “meaningful” covenants was a sign that “prudent underwriting practices have deteriorated”.
Forbes added:

Whether covenants afford much protection or not, the pressure from private equity sponsors on financiers to ditch them is building.

US lenders hungry for yield are keen to fund European companies, which means sponsors always have the option to take their deals across the Atlantic to take advantage of low margins and looser terms
Returning to Bill White and his concerns:

The first thing I would worry about are asset prices. Every asset price you could think of is in very odd territory. Equity prices are extremely high if you at valuation measures such as Tobin’s Q or a Shiller-type normalized P/E. Risk-free bond rates are at enormously low levels, spreads are very low, you have all these funny things like covenant-lite loans again.
Private equity underwriters (PEU's), at least those monetizing affiliates, couldn't be happier with extremely high equity valuations and dirt cheap financing.  The question is how much can they cash in before things change.

The strengthening growth might be a mirage. And if it does not materialize, all those elevated prices will be way out of line of fundamentals.
It's one of three scenarios offered by White. 

This is the last of a whole series of bubbles that have been blown.
The bubble may gently decompress or it may burst.   It's our bubble blowing PEUniverse. 

Update 4-13-14:  Ashleigh Rogers of Seeking Alpha sees blue skies ahead for Carlyle.   She finds it a screaming buy.  This will improve her chances of interviewing Carlyle co-founder and chief salesman David Rubenstein.