Moody’s: Buyout Firms Will Impact Downtown

The pool of private-equity-owned companies with weak credit ratings is swelling to an “alarming” level, posing an elevated risk of default when conditions in debt markets deteriorate, according to Moody’s Investors Service.

This story by Christine Idzelis originally appeared in Institutional Investor.

About 90 percent of companies owned by private equity firms are rated at least five levels below investment grade. The credit rater described the growing amount of debt issued by companies graded at six notches into speculative-grade territory as “eye-catching.” 

Bull market conditions that emerged after the Great Recession have allowed buyout firms to finance their deals with more leverage and on terms more favorable to their position as controlling shareholders, according to Moody’s. The credit rater said their aggressive behavior will exacerbate the next default cycle, which it expects to be longer than the one after the 2008 financial crisis.

Staving off bankruptcies may prove more difficult because it will probably take longer to push through to the next “benign” credit environment, David Keisman, a Moody’s analyst and lead author of the report, said in a phone interview. Lenders might prefer pre-packaged bankruptcies to the series of distressed-debt exchanges that in the last default cycle helped bridge the way back to a bull market, he said.

Debt holders could potentially see greater recoveries from a quick bankruptcy than from attempting multiple distressed-debt exchanges drawn out over years, Keisman explained. Bankruptcies are less desirable for private equity firms, as they can salvage their ownership of companies through distressed exchanges.

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