But the PE industry faces a formidable refinancing cliff in the coming years, says Bain Capital in its Global Private Equity Report 2010 (free pdf)
Selected excerpts:
Energy and healthcare topped a recent poll of sectors where PE fund managers and their advisers expect to see significant levels of investment over the coming year. Both had been among industries that increased their share of total PE deal making during the rising PE market of 2003 to 2007, and they look poised to continue their ascent.
Hot geography: Asia-Pacific. The smaller impact of the credit crisis on Asia-Pacific’s markets and the better prospects for economic growth continued to make the region attractive to PE investors during the downturn. Even as PE contracted globally from 2007 to 2009, Asia-Pacific’s share of investment nearly tripled from about 8 percent to 23 percent.
Hot asset class: Distressed investing. The tough economy and challenging debt conditions of 2008 and 2009 created some of the most favorable investment opportunities in the distressed debt market, including debt trading, loans-to-own and restructurings.
The most fertile targets for distressed investing will likely be in those hard-hit sectors such as discretionary spending on consumer goods, like luxury products, and media and entertainment. Companies in these areas will continue to need substantially more outside funding over the next two to three years or risk greater probability of default.
Creating value through activist ownership is becoming the most important differentiating capability. Deal returns were 3.6 times the original investment in situations where early post-acquisition work was undertaken—well above the industry average of 1.4 times.
Refinancing challenges: The biggest challenge for the high-yield bond and leveraged loan markets—and consequently for the PE market—is the looming refinancing cliff (also commonly referred to as the refinancing wall). Investors’ limited capacity to absorb a growing supply of refinancings may severely crimp the borrowing needed to finance new PE deals—and the shortfall will begin to show up in 2010, when the market starts to climb the base of the cliff.
Over the next five years, issuers of speculative-grade debt (including PE-backed borrowers) will need to refinance roughly $850 billion in maturing debt denominated in US dollars—$500 billion of it in the form of leveraged loans and $350 billion in high-yield bonds. The refinancing obligations will start off slowly in 2010, amounting to less than $50 billion; but they will rise steeply through 2014, when some $355 billion will come due. The steepest cliff wall will be in the leveraged loan market between 2012 and 2014, when more than 85 percent of loans outstanding mature. Most of that debt is owed by PE-sponsored companies.
Technorati Tags: Asia-Pacific-region, energy, Healthcare, junk-bonds, leveraged-loans, luxury-goods, media and entertainment, private-equity, PulseCheck
The fundamentals are unchanged for growth of the EMEA high-yield bond market – but current market turmoil shows the road will be bumpy, according to Moody’s.
Highlights from Moody’s Special Comment. (Premium):
- The fundamental drivers for increasing bank disintermediation remain intact, despite the current turmoil in the capital markets and the apparent recovery of bank risk appetite.
- Adequacy of funding liquidity remains a key credit and rating driver for many high-yield companies, which need to remain cognisant that market access can dry up, as they consider their refinancing plans
- Although Moody’s forecasts that the Europe, Middle East and Africa (EMEA) high-yield default rate will fall to 2.5% in the next 12 months from 9.6% in January 2010, a period of reduced capital market access is an important factor that could contribute to a more pessimistic downside forecast of 7%.
Following some recovery in Q4 2009 and the early part of January, the EMEA capital markets are currently in a period of turmoil as a spillover from concerns over sovereign creditworthiness and possible longer-term implications for the financial structure of the EU.
Technorati Tags: EMEA, high-yield, junk-bonds
Good roundup of commentary on Obama big bank proposals at The Big Picture
Temp jobs generally lower workers’ employment and income prospects over time (MIT study)
Treasury Weighs Fixes to Foreclosures Program (NYT) … but measures may just prolong foreclosure crisis
ETF assets have grown from near zero to more than $1 Trillion in 10 years (The Economist via @graubart)
VentureSource: VC industry ends 2009 with strong 4Q; Annual investment down 31% from 2008
They’re back: ratings agencies reviewing new private-label jumbo mortgage securities offerings
Listen to Joseph “Freefall” Stiglitz beat up on the big banks for an hour on The Diane Rehm Show
Which governments are really at risk of bankruptcy?
Risky business is back in style: high-yield corporate debt issuance reaches record $11.7 billion in latest week
Commercial real estate investment has risen by more than 40% in Europe in the past quarter
Sign of tougher FDA action: Reversing itself, FDA expresses concerns over health risks from BPA plastic
Technorati Tags: big banks, BPA, commercial-real-estate, ETF, foreclosures, jobs, junk-bonds, mortgage-backed-securities, venture-capital
The trailing 12-month global speculative-grade default rate finished at 12.5% in the fourth quarter of 2009, down slightly from 12.6% in the previous quarter, according to Moody’s. The global default rate peaked in November at 12.9%, which surpassed 2001’s peak of 10.4% and 1991’s peak of 12.2%. A year ago, the global default rate stood at 4.2%.
The ratings agency’s default rate forecasting model now predicts that the global speculative-grade default rate will fall sharply over the next year to 3.3% by the end of the fourth quarter.
The pace of the decline is expected to be more rapid in the first half of the year with the default rate falling to 6.4% by the end of June.
Under its baseline scenario, Moody’s forecasting model now predicts that the default rate for U.S. speculative-grade issuers will drop to 3.6% by the end of 2010. Meanwhile, the European speculative-grade default rate is expected to drop to 2.7% by the end of the year.
Across industries over the coming year, default rates are expected to be highest in the Consumer Transportation sector in the U.S. and the Business Service sector in Europe.
Moody’s speculative-grade corporate distress index — which measures the percentage of rated issuers that have debt trading at distressed levels — came in at 18.8% at the end of the fourth quarter, down from 28.5% in the previous quarter. A year ago, the index stood much higher at 54.1%.
The trailing 12-month U.S. leveraged loan default rate finished the fourth quarter at 11.6%, up from 10.5% in the previous quarter but down from November’s peak of 11.7%. In 2008, the U.S. loan default rate ended at 3.4%.
More details available here (Premium)
Technorati Tags: corporate-default, junk-bonds, speculative-grade-bonds
Between 55 and 75 Western European companies with speculative-grade credit ratings could default in 2010, representing a default rate of between 8.7% and 11.1%, according to Standard & Poor’s Ratings Services.
“While the annual default rate is likely to have peaked at 13.1% in the third quarter of 2009, we expect it to continue to run at more than double its historic average throughout 2010, as the slow pace of economic recovery is likely to be insufficient to save many highly leveraged and poorly performing companies.”
Weak capital spending prospects by European companies, coupled with a likely further rise in unemployment, continued weakness in regional housing markets, ongoing tight lending conditions by banks, the threat of rising interest rates and taxes, and a strengthening euro present a tough challenge for corporate credit quality in 2010.
The report outlines S&P’s predictions for credit quality in 2010 in the European banking, corporate, insurance, and leveraged finance sectors.
The sectors that have the greatest vulnerability to default (with a disproportionate percentage of ratings at ‘B-’ or below) are, in descending order, telecommunications services, chemicals, hotels and gaming, energy, transportation, and consumer products.
For details see: A Tepid Recovery Will Strain European Corporate Credit Quality In 2010 (Premium)
Technorati Tags: corporate-default, Europe, junk-bonds, speculative-grade-bonds
Companies to vie for lenders’ attention as $800bn wave of debt comes due in next five years.
Excerpts from Refinancing the Buyout Boom: Profiles of Select Leveraged Credits (complimentary download)
In the next five years, an unprecedented amount of leveraged loan and high yield bond debt comes due. Each dollar of the more than $800 billion in debt maturing in this period will need to be addressed on a company-by-company and highly negotiated basis.
Many, if not all, of the companies that issued such debt have seen deteriorating operations while the credit markets remain selective. Furthermore, maturity
concentration ensures that many companies will be vying for lenders’ dollars and attention over the next several years. As a result, upcoming maturities will remain the
largest medium-term overhang to those highly leveraged credits that incurred a significant amount of debt (notes and loans) as a result of LBOs in 2005-2007.
Fitch Ratings believes that managing these maturities will be among the primary issues facing these companies over the next several years. Alternatives include: 1) repayment from cash flow (operations or asset sales); 2) refinancing in the bank or bond market; 3) retirement from IPO proceeds; 4) debt exchanges; or 5) bankruptcy court.
Fitch believes the fight for liquidity and solvency will be won or lost based on individual business risk characteristics, prospects for growth, features/restrictions within debt agreements.
In this report, Fitch provides an in-depth analysis of nine ‘B’ and ‘CCC’ category companies in Fitch’s rated universe that represent over $100 billion in total debt across
six sectors, and presents detailed assessments of their capital structures, financial covenant flexibility, and recovery prospects.
The companies profiled are: ARAMARK Corporation ; Energy Future Holdings Corp. ; First Data Corporation; Freescale Semiconductor, Inc.; HCA Inc,;The Nielsen Company B.V.; SunGard Data Systems Inc.; Toys “R” Us, Inc.; and Univision Communications, Inc.
In conducting its analysis, Fitch made the following key observations:
- Although most of the companies have generated free cash flow during the downturn and are expected to continue to do so, it will fall far short of the amount necessaryto repay maturing loans, requiring refinancing and/or negotiating with lenders.
- Although the companies profiled here do not compete with one another in their core businesses, they will compete for a potentially limited supply of debt capital over the coming years.
- Fitch does not expect the institutional loan market to be able to absorb all of the institutional loan debt that comes due during the next five years. The high yield bond market will likely expand to absorb a portion, but its capacity could be stressed by the absolute volume of debt that comes due in this period.
This report has been made available free of charge to Research Recap users for 30 days by special arrangement with Fitch Ratings, an Alacra content partner. After 30 days, the report will revert to its regular AlacraStore price of $275.
Technorati Tags: Aramark Corporation, Energy Future Holding Corp., First Data Corporation, Freescale Semiconductor, HCA Inc., high-yield, Inc., junk-bonds, leveraged finance, leveraged-loans, SunGard Data Systems Inc., The Neilsen Company, Toys "R" Us, Univision Communications
Globally, 57 companies (50 public and seven confidentially rated) defaulted in the third quarter of 2009, bringing the year-to-date total to 225, according to Standard & Poor’s.The volume of rated debt affected by defaulters in the third quarter was $126.9 billion, with the U.S. region (the U.S., Bermuda, and the Cayman Islands) accounting for nearly 82%.
The quarterly corporate default rate for speculative-grade-rated entities was 2.1% at the end of third-quarter 2009, compared with 0.77% at the same time in 2008.
On a trailing-12-month basis, the global speculative-grade default rate as of Sept. 30, 2009, reached an 82-month high of 9.58%.
In the first nine months of the year, the number of global defaults exceeds the total for 2008, and it’s on track to eclipse the previous high of 229 in 2001 – Diane Vazza, head of Standard & Poor’s Global Fixed Income Research Group.
For a details, see “Quarterly Default Update And Rating Transitions (Premium).”
Technorati Tags: corporate defaults, corporate-debt, junk-bonds, speculative-grade-bonds
Moody’s says global speculative-grade default rate will rise to a peak of 12.5% in the fourth quarter of this year and then decline sharply to 4.5% a year from now.
Excerpts from Moody’s “September Default Report”
The trailing 12-month global speculative-grade default rate finished at 12.0% in the third quarter of 2009, up from a level of 10.6% in the previous quarter and only 2.8% a year ago.
The U.S. speculative-grade default rate ended the third quarter at 12.9%, up from 11.5% in the second quarter, while in Europe the default rate rose to 9.3% from 6.4%. At this time last year, the U.S. and European default rates stood at 3.2% and 0.7%, respectively.
In all, a total of 50 Moody’s-rated corporate debt issuers defaulted in the third quarter, down from 89 in the first quarter and 83 in the second quarter. Last year, only 62 defaults were recorded in the first three quarters of the year.
For U.S. speculative-grade issuers, Moody’s forecasting model predicts that the default rate will peak at 13.5% in the fourth quarter before declining sharply to 4.4% by the third quarter of 2010.
Overall, the Automotive industry was the worst performer in the third quarter as seven companies in that sector defaulted. The Advertising/Publishing/Printing Media industry followed closely behind with six defaults. Across regions, 39 of the Q3 defaulters were based in North America while eight were from Europe. The remaining defaulters were domiciled in South America and Asia.
Across industries over the coming year, Moody’s default rate forecasting model indicates that the Consumer Transportation sector will be the most troubled in the U.S. and the Durable Consumer Goods sector will have the highest default rate in Europe.
Moody’s speculative-grade corporate distress index — which measures the percentage of rated issuers that have debt trading at distressed levels — stood at 28.1% at the end of the third quarter, down from 36.3% in the previous quarter. A year ago, the index stood at 26.8%.
Technorati Tags: corporate-default, credit-markets, junk-bonds, speculative-grade-bonds
Ratings agency expects default rate to decline after November.
Moody’s Liquidity-Stress Index continued to fall in September and at 14.0%, was down more than three percentage points for the quarter. This is the lowest that the Liquidity- Stress Index has been since October 2008’s level of 13.9%, said Moody’s in its latest “SGL Monitor Flash” report.
The sharp drop in the LSI highlights a trend of meaningful improvement in liquidity among speculative-grade corporate issuers, and offers more evidence that the default rate is likely to decline after November 2009.
The number of lowest-rated SGL-4 issuers fell last month to 72 from 78, down 32% from a peak of 106 at the end of March. SGL upgrades outnumbered downgrades by 5 to 1 in September, as refinancing, cash conservation and new debt continued to give issuers more breathing room.Overall, there have been 48 SGL upgrades and 22 downgrades since May 2009.
[Standard & Poor's said the junk bond default rate in the U.S. fell for the first time this year, coming in at an estimated 9.36% in September.]
Technorati Tags: corporate-default, credit-markets, junk-bonds, speculative-grade-bonds
But Standard & Poor’s sees continued deterioration of credit quality and restricted lending conditions.
Excerpts from Default, Transition, and Recovery: U.S. Credit Metrics Monthly: Default Rate Recedes In September
The speculative-grade default rate in the U.S. has fallen for the first time this year, coming in at an estimated 9.36% in September. However, credit metrics in the U.S. show continued deterioration of credit quality and restricted lending conditions, contrasted with signs of life among new issuance.
- The number of corporate defaults in 2009 slowed markedly in the U.S. in September, totaling eight during the month. This brings the year-to-date total to 155. The defaults in September are attributable to five nonfinancial sectors.
- The preliminary estimate for the U.S. 12-month-trailing speculative-grade default rate in September is 9.36% (subject to revision), down from the 10.4% in August and the first decline in the default rate this year.
We expect the speculative-grade default rate to escalate to a mean forecast of 13.9% by August 2010, but it could reach as high as 18% if economic conditions are worse than expected.
Technorati Tags: corporate-default, credit-markets, junk-bonds, speculative-grade-bonds
