The Wall Street Journal recently reported on more than $550 billion in debt taken on by European companies acquired in leveraged buyouts which will be reaching maturity within the next five years.
This massive wave of approaching debt repayment obligations is a significant issue for a number of reasons. The PE firms backing many of these highly-leveraged companies have been grappling with the task of adding value in the throes a challenging economic environment, as well as with a reduced ability to exit via secondary deals and IPOs.
In the U.S. we haven’t yet experienced the same types of debt problems because of the appetite for high yield bonds in this country. The buyout peak of 2007, which saw nearly $1.6T in deal volume by middle of that year in the U.S. alone, also spurred the creation of a lot of debt in PE-backed companies. We are beginning to see the maturity of that debt. Again, the problem here is that many of those companies haven’t grown in the way they were expected thanks largely to a battered global economic landscape. The fallout in the U.S. is a trend of PE companies buying themselves more time on their obligations by refinancing. And these companies are avoiding exorbitant interest expenses in a high yield debt market which, fortuitously, is experiencing low premiums. Last year, KKR alone extended or refinanced nearly $60 billion of debt for its portfolio companies.
But banks across the pond are wary of refinancing the half-trillion in burdens coming due over there, and there is no robust debt market, as in the U.S., which is helping to alleviate the situation. Clearly, all of this debt crashing down at once will lead to a lot of scrambling and, most likely, a lot of restructuring. To exacerbate matters, some analysts are forecasting a growing and sustained debt aversion scenario, even here in the U.S.
This situation, as with any, cuts both ways. The multitude of steeply-leveraged companies and those with meager earnings will continue to struggle to find financing opportunities. And this is could very likely spell the end for many of the zombie companies which have been hobbling along for the past several years. The upside may come for those who will be splitting up the remains.
Specialty sector focused, private equity firm with flexibility and cash position will do well as credit dries up and an acquisition environment looms. And unique funds will have the opportunity to contribute to the type of reorganization that can allow the true economic therapy to begin – putting an end to the zombies and building real commercial and investor value going forward.