The Globe And Mail has a story on its Report On site entitled "Private equity’s high-wire act: Can leveraged buyout artists build firm foundations on soft money?" The article discusses the current low default rate on the debt that has been financing private equity buyouts and considers who will get hurt when the default rate rises.

The article makes a number of interesting observations about the risks in the current buyout market, including the following:

  • Banks hold a smaller percentage of leveraged debt, having sold off debt to hedge funds and others though pooling vehicles such as collateralized loan obligations, known as CLOs.
  • This trend has put some banks in something of a loan broker role, making the initial acquisition loan but later selling the position.
  • The free cash flow to interest expense ratios are now in the 1.7 range, a noticeable reduction from the 2.6 average three years ago.
  • Toggle bonds, which allow borrowers to issue new bonds, often at higher rates, to finance interest costs on the existing bonds, have become more common.

The article concludes with a discussion of what might bring this private equity cycle to an end, a question on many people’s minds these days. For more on this issue, you may find interesting three past posts on the general subject, available here, here, and here.