The New York Times DealBook blog has an interesting post about the risks posed by all the debt that helps fund the many private equity buyouts these days. It points to two articles in the UK press on the topic.
The first article, in the Financial Times, discusses comments by Larry Fink, the CEO of BlackRock, about how increasing levels of debt, lowered risk premiums, and less restrictive lending standards in connection with today’s private equity deals may end up creating "tomorrow’s problem." A major downturn in the economy could transform buyout debt into distressed debt.
The second article, in The Guardian, reports on the Bank of England’s warning about "how quickly credit quality can deteriorate following a period of lax credit standards." Sir John Gieve, one of the Bank of England’s deputy governors, is quoted as saying that the "rapid growth in credit risk transfer markets is also making more participants dependent on continuous market liquidity and could amplify the impact of a sharp reversal in credit spreads from their current low levels."
In addition, an increasing amount of corporate debt now involves second lien loans, and out-of-court restructurings and bankruptcy cases could be noticeably more complex. Although neither article suggests that defaults are about to spike, the perspectives offered about how quickly that could change — if economic conditions turn for the worse — makes for interesting reading.