Sharp Rise in LBO-Related Defaults
The global meltdown in mortgage-"backed" debt threatens to obscure a rapid rise in LBO-related defaults.
According to a recent report form Standard & Poors, "In the first eight months of 2008, 55 entities have defaulted globally, compared with just 22 in all of 2007 and 30 in 2006. The global speculative-grade default rate has increased to 1.9%, more than double the year-end 2007 level of 0.86%. In the US, which accounts for 53 of the 55 defaults, the default rate increased for eight consecutive months to 2.5% in August…We expect the default rate to continue this ascent and reach 4.9% in the next 12 months. (our emphasis)
Of the defaults recorded, the report continues, nearly 70% record some form, somewhere, some time, of LBO exposure. "Ownership of the 55 defaults…reveal that generally, large shareholders of these defaulted entities are asset management firms, alternative investment funds, endowment and pension systems, and individual stakeholders." Tracking the interconnections along the debt trail reveals the complex interweaving of various investors as well as the extent to which the buyout debt has spread throughout the investor universe: "For example, endowment and pension funds are invested in alternative investment funds, which also have exposure in other asset-management funds, which also have exposure in other asset-management firms, which then manage the finances of high-net-worth individual investors who also have stakes in alternative investment funds…"
Among the corporate defaults can be found some of the restaurant and gaming companies taken private and previously noted on this website (see for example Casino Business Wobbles at High Stakes Debt Table and All-you-can-eat Dividend Recaps Sink Major US Restaurant Chain .