PE firms cash in on easy loans, raise risk for creditors - Moody's

Tue Nov 27, 2012 1:55pm EST

Nov 27 (Reuters) - Easy access to cheap money is helping private equity firms capitalize on their investments even in speculative-grade companies but investors in such companies may be vulnerable in the event of a U.S. economic downturn, Moody's Investors Service said in a report.

Covenant-lite loans, secondary buyouts and dividend recapitalizations -- all of which raise risks for creditors -- have been prevalent this year amid strong high-yield bond issuance, Moody's said.

High-yield issuance rose to $514 billion during January-October from $425 billion a year earlier, according to Thomson Reuters Data.

Covenant-lite loans have been the province of private equity, which is present in almost 90 percent of such new deals, the report said. Covenant-lite loans are considered more favorable to borrowers as they do not contain as many restrictions on servicing the debt.

Low-cost debt financing has also spurred secondary buyouts - sales from one private equity firm to another. Looking to cash out on their investments, buyout firms are opting to sell to other buyout shops rather than braving a still volatile equity market to take companies public.

Moody's also expects private equity firms to continue to use debt-financed dividends, or dividend recapitalizations, to generate returns from their companies.