By Jonathan Stempel
NEW YORK (Reuters) - Markets face a greater risk for a liquidity crisis than a decade ago, when the Long-Term Capital Management hedge fund collapsed, potentially jeopardizing the private equity takeover boom, NYSE Euronext's (NYX.N: Quote, Profile, Research, Stock Buzz) (NYX.PA: Quote, Profile, Research, Stock Buzz) chief executive said on Tuesday.
"Right now, we're in a high-liquidity, low-rate, low credit spread environment," said John Thain, who runs the trans-Atlantic exchange, at the Reuters Exchanges and Trading Summit in New York. "That's probably not going to continue forever.
"The combination of money available to the private equity world and the hedge fund world, and that needs to be put to work to earn returns, is what's driving this," he added. "For me, the question is, does this liquidity get drained out of the system, (and) does it happen in an orderly or disorderly way."
Private equity firms buy controlling stakes in companies, restructure the businesses, and often sell a couple of years later, keeping perhaps one-fifth of the profits.
Three of this year's largest announced takeovers have been led by private equity: Texas power company TXU Corp. TXU.N for $32 billion; credit card processor First Data Corp. FDC.N for $26 billion, and student loan provider SLM Corp. (SLM.N: Quote, Profile, Research, Stock Buzz) or Sallie Mae, for $25 billion.
Many private equity firms fund takeovers through the issuance of below-investment-grade, or junk-rated, debt.
That's often cheap now. As of Monday, the average junk bond yielded just 7.452 percent, or 2.69 percentage points more than U.S. Treasuries, Merrill Lynch & Co. data show.
In contrast, the average yield was 14.24 percent and average spread 11 percentage points in October 2002, at the depths of a three-year bear market in stocks. Continued...
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