'Exuberant' markets won't last, Goldman director says
Friday, March 02, 2007 6:49:15 AM (GMT-06:00)
Provided by: Reuters News
By Elena Moya
LONDON, March 2 (Reuters) - "Exuberant" markets will come to an end when liquidity and confidence slow, pushing highly leveraged companies into bankruptcy, said Lachlan Edwards, head of European Restructuring at Goldman Sachs Group Inc. <GS.N>.
Record private equity and hedge fund investment in European companies helped fuel debt levels to 5.4 times corporate profits last year, more than the 4.3 times in 2003, according to Goldman Sachs data.
"The market has been exuberant for two years or more," Edwards told Reuters in an interview in London. "It has been able to delay restructurings using innovative complex structures and liquidity; but there has to be a point at which any company has too much debt."
Ample access to cash has helped businesses, such as Britain's printing company Polestar, refinance themselves, avoiding a debt restructuring or an insolvency.
Honsel International Technologies, a troubled German auto-parts maker, is expected to complete a refinancing within a few weeks, after receiving additional investment from private equity sponsor Ripplewood Holdings.
A majority of private equity firms expect up to 20 percent of their corporate investments to breach debt covenants or go through a debt restructuring over the next three years, according to a survey published in January.
Private equity firms are contributing to a deterioration in the quality of European companies as sometimes they borrow money to pay their new owners a dividend, Standard & Poor's recently said.
"When I started as a banker, if somebody suggested you should lend money to pay a dividend, they'd be sacked," said Edwards, an Australian native hired by Goldman in July, from Rothschild <ROT.UL>. "Now it is done all the time."
CONFIDENCE
The change in the cycle won't be sudden, Edwards said in the interview earlier this week. Confidence and liquidity will gradually slow, while the opportunity to use financial products to alter the balance sheet, delaying a restructuring, sometimes can be only done once, he said and gave as an example selling real-estate.
The current interest of private equity firms and hedge funds for Britain's No. 3 food retailer Sainsbury <SBRY.L> is based on the hopes of a potential sale, and lease back, of its real estate business, hedge funds have said.
"Financial engineering can change that to an extent and an investors willingness to lend at lower rates will also help, marginally," Edwards said. "These things don't mean that the business can sustain debt levels of ever increasing multiples."
The share of speculative-grade rated companies in Europe rose to 17.2 percent in 2006, from 1.2 percent 15 years ago, and 5 percent in 1996, according to credit ratings agency Standard & Poor's.
"Confidence is hard to judge but will be affected by factors such as the recent unexpected rate rise, or a big company going into bankruptcy, or a real estate market correction," Edwards said. "That will reduce liquidity as liquidity is a manifestation of confidence."
|
