A lengthy piece was published in Canada's Report on Business today about private equity and its impact on the North American mortgage and LBO markets. The author wimps out on his ultimate conclusions but the facts don't change.
To make a long story not as long, there is tremendous pressure out there to make deals right now whether they make sense or not. Get used to hearing about "covenant lite" loans, because IMO that's going to become the buzz phrase of blame after the shit hits the fan just like "portfolio insurance" was back in 1987.
Some snippets from the article:
.....there's no stopping private equity's “golden era,” to borrow the phrase that Henry Kravis, the godfather of the LBO, used at a conference in Halifax a few weeks ago.....
.....The fees for arranging loans are as alluring for the commercial banks as they were for subprime lenders. “It's like crack cocaine for them,” says the unnamed private equity partner. In LBO deals, “the banks don't care any more about the [quality of] credit. As long as they can sell it all, they're fine.....
.....Why do bond investors put up with this? “They don't really have much choice.....if you're managing a high-yield bond fund, there's really not an option of going to 25 per cent cash. So you have to invest in the best deals that you can find. And because there's so much money out there, the issuers can say, ‘You want to argue about covenants? The deal's oversubscribed 3 to 1. See you on the next one”.....
.....if that strategy explodes in their faces because they end up holding some worthless junk debt, so be it. For as long as it lasts, it's an easy route to profits. Hedge funds get into trouble and are forced to close shop all the time, but no one ever asks them to return their fees....“Why would you not just take the highest possible risk with other people's money? If there's literally no downside, it's the rational thing for you to do.....
reportonbusiness.com
. |
