Nov 27 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.