Last week saw what may prove to be early signs of a turn in the robust market for the debt that finances private equity buyouts. In just a week’s time, The New York Times reported on a possible cooldown in the buyout market, and the Financial Times published a commentary on signs of a possible "bondholder revolt" against issuer-favorable debt terms (including low debt coverage ratios mentioned in an earlier post) that have prevailed for the past several years. In addition, the DealBook Blog‘s post entitled "Buyout Boom Could Slow As Investors Push Back" discussed how several buyout debt offerings were recently curtailed or modified, a first in this previously strong debt market.

Then, in a separate but interesting move, the former co-head of investment banking at UBS, Jeff McDermott, left last week to start a new private equity firm, Stony Lane Partners. Stony Lane’s focus? Buying and turning around distressed businesses. When asked by the Financial News why he’s making the move, McDermott answered:

I think a credit crunch will play out over time, and it will be like a slow rolling wave. It’s won’t be a one-day cataclysmic event. I think there will be double leverage in the system. I think CDOs are buying margin leverage and are buying corporate credits, which are priced like there’s no end to economic growth in the future. Of course, there are economic cycles.

If he’s right, a rise in defaults, restructurings, and Chapter 11 bankruptcy filings may be coming down the road.