Trouble starts when the big money boys no longer trust each other to make good on their debts. Morgan Stanley Wealth Management indicated that this phenomenon could be approaching with its exit of junk bonds:
We recently took our remaining high yield positions to zero as we prepare for deterioration in lower-quality earnings in the U.S. led by lower operating margins.”Private equity underwriters float junk bonds to fund buyouts. When PEU affiliates fail they end up in the hands of bondholders. Ironically, this opens the door for an affiliate to pass from one PEU to another. The equity holding PEU loses out while the bondholding PEU takes control in an affiliate bankruptcy.
Once the junk bond falls far enough PEU sharks will enter the water hoping for a back door takeover. Carlyle took control of Brinton's and Mrs. Fields in such a manner, but is in line to lose control of ManorCare for failure to meet its lease obligations. C'est la vie...in our PEU world.
Update 1-9-18: Chapter 11 bankruptcies rose to Great Recesssion levels and commercial bank lending to corporations is stalling out.
