Debt mountain still looms for LBO debt
LONDON/NEW YORK (Reuters) - Private equity firms face a mountain of debt to refinance from deals done as the industry boomed and the threat of rising interest rates will only exacerbate their problems, industry experts warn.
Some $645 billion of leveraged loans, the majority of which funded leveraged buyouts, will fall due by the end of 2015 in the U.S.; and some $500 billion across Europe, Middle East and Africa, according to Thomson Reuters LPC data.
"We have all got the chart that shows it spiking in 2011, 2012 and 2013 and people are very worried when the bullet payments become due how they will get refinanced," Charlie Bott, managing partner of European buyout firm BC Partners BCPRT.UL told the Reuters Private Equity and Hedge Funds summit.
Bott added that he was confident BC Partners can repay all of the debt as appropriate on time. Some buyout firms are proactively restructuring debt before the maturities. Blackstone Group (BX.N) for examply has said that since the beginning of last year, it bought back, amended or extended about $23 billion of debt in its private equity portfolios.
But some in the industry fear interest rates rising to keep a cap on inflation, making refinancing a lot more difficult.
At very low interest rates, "improbable amounts of debt" can be supported for very long periods, Jon Moulton founder and managing partner of Better Capital (BCAP.L) said, pointing to some 30 billion pounds of debt in small and medium-sized British companies falling due in the next three years.
"There is a very clear and serious risk. Interest rates are pretty critical to whether or not things can get refinanced," Moulton said.
The demand for capital to bail out struggling companies will also be greater if public spending is cut, Moulton added.
DEBT FOR EQUITY SWAPS
As portfolio companies have seen sales slump, buyout firms have been faced with the choice of injecting more money or losing control of their investment.
Earlier this week, British private equity firm 3i Group (III.L) lost control of laser eye surgery business Ultralase and Global Garden Products to its lenders, completing a trio of written off investments after British Seafood which was placed in administration the previous week.
There are 2,000 to 3,000 enterprises in the UK worth between ten and a couple of hundred million pounds, where debt exceeds enterprise value, Better Capital's Moulton said. Including smaller businesses, the number could exceed 10,000 companies he added.
"It looks like there have been several hundred debt for equity swaps in the last few months and certainly talking to a few of the larger banks they are talking about doing a hundred each or some similar number this year," Moulton said.
BC Partners lost outright control of British real estate chain Foxtons in January to its lenders but injected 50 million pounds to remain the largest single shareholder.
"The name of the game for private equity firms when they've got troubles is to try and hang onto their businesses through difficult times, so when the good times come back they still have a stake in the game to get their money back," said BC Partners Bott.
The retraction in leverage has meant buyout firms have had to become more focused on the operational performance of their portfolios.
"There will be winners and losers as the phase-change occurs and deals that were driven with a financially-oriented model now move into this more austere period of operational-driven returns," said Fred Crawford, chief executive of turnaround and advisory firm AlixPartners LLP.
Crawford, speaking at the summit in New York, said financially engineered shareholder returns are now much harder to come by.
(Editing by Elaine Hardcastle)