RLPC-Leveraged buyout debt mountain poses risk to UK -BOE

LONDON, March 14 Thu Mar 14, 2013 1:44pm EDT

LONDON, March 14 (Reuters) - The Bank of England warned that around 73 billion pounds ($109 billion) of loans that financed a boom in buyouts of British firms come due in the next five years, posing risks of a drop in investment and a rise in defaults.

"The amount and maturity profile of buyout debt could present risks to UK financial stability," the bank said in its first-quarter bulletin on Thursday.

During Britain's buyout boom, which peaked in 2005-2007, private equity firms raised loans to back leveraged buyouts (LBOs) of increasingly larger companies, leaving them heavily indebted and more vulnerable to default.

Many such loans raised at the height of the market will need to be refinanced over the next few years in a market that now has much tighter credit conditions, the central bank said.

In one example of an LBO, Acromas was formed at the peak of the buyout boom in 2007 though a 6.2 billion pound private equity-backed merger of motoring services company AA and over-50s insurer Saga.

The merger was financed with a 4.8 billion pound loan, which was backed by the assets of the company and comes due in September 2015. It is held by Barclays and Mizuho.

Refinancing has proved difficult to date because banks are not willing to lend as much debt against business.

Highly leveraged private equity-owned companies are more likely to default, which could pose a risk to the financial system through increased losses on bank lending, the bank report warned.

Companies with higher debt levels also are less likely to invest for the long term as they concentrate on servicing debt, which could have a knock-on effect on the economy and an indirect impact on the financial system because of lower long-term corporate profitability, the report said.

Lengthening exit timetables, low interest rates and high levels of bank forbearance on LBO loans mean that a complete picture of how companies are performing may not be available for a number of years, according to the central bank report.

REFINANCING CLIFF

The risk of default is higher in those cases that private equity firms have taken dividends out of companies without any underlying improvement in corporate performance, the bank said.

Around 32 billion pounds of LBO debt is expected to mature in 2014-15 and another 41 billion pounds in 2016-18, according to the report.

A weak economy, the high volume of maturing loans and a contraction of the investor base interested in leveraged loans since the financial crisis could complicate the refinancing task.

Collateralised loan obligation (CLO) funds, formerly the biggest buyers of LBOs, are reaching the end of their reinvestment periods, which will restrict the amount they are able to invest in the future.

Banks are more concerned with balance sheet repair than providing refinancing, which also poses a significant hurdle to refinancing buyout loans.

Other financing options, such as high-yield bonds, are much less developed in Britain than in the United States.

Private equity firms could still play an important role in promoting economic recovery by restructuring struggling companies, but the level of new buyout transactions, as opposed to secondary buyouts, remains subdued, the report concluded.

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