No Deleveraging in PE Buyouts: New Study Points to Rising Debt, Rising Risk of Default
According to a new report by Standard & Poor's, the "deleveraging" expected in the wake of the credit crunch has not only failed to materialize, but debt levels in private equity buyouts in Europe have actually risen, heightening the risk of default. The head of research at Standard & Poor's, who have released a new study, told the Financial Times on June 5: "In the current market where the availability of debt has declined and business prospects are deteriorating, you would expect deals would get more conservative."
According to the study, however, in private equity buyouts between €250-500 million, leverage has actually substantially risen. In the first quarter of 2008, debt to cash flow multiples rose to 6.8, as against an average of 5.8 for 2007. Purchase prices multiples also increased to 10.4 times EBIDTA compared with an average 8.7 last year. Cash available to companies taken private through leveraged buyouts for paying off their debt has fallen to 2.2 times their debt levels, compared with 2.5 in 2007 and 4 in 2003.
The conclusion? "Record levels of leverage in deals, rising purchase price multiples and the falling ratio of cash that companies have available to cover debt will make it harder for them to repay their loans and put pressure on default rates."
A convenient survey of recent US pe-banked bankruptcies can be found here. Among the pe-owned companies in the IUF sectors in the US which have recently filed for bankruptcy are the restaurant chains Vicorp Restaurants Inc., which will be closing 56 Village Inn and Bakers Square Restaurants, and Buffets Inc., the largest national steak restaurant chain. According to the report, the cookie maker Mrs. Fields Famous Brands is preparing to file for bankruptcy soon.