Big Ben cut deeper than expected today, by slashing the Fed rate from 5.25% to 4.75%. Most market watchers had been predicting just a quarter-point cut, and the lack of pre-bake drove up the Dow by around 336 points.
Much of the reaction so far has included words like “bailout,” with Big Picture blogger Barry Ritholtz suggesting that the Fed has become “Wall Street’s bitch.” And that may well be on the money.
For our purposes, though, the salient question is whether or not the rate cut can help spur a return to PE salad days. Or at least to PE amous bouche. I’m really hoping so, given that I predicted on CNBC’s Fast Money last month that the buyout market would beguin returning on or around Sept. 24 (unplanned comment… got caught off-guard).
The best answer I can give right now is that the Fed cut isn’t a cure-all, but it should certainly help. The buyout market’s biggest obstacle continues to be existing loan commitment for pending deals, and bankers must unload most of it before getting down to new business. The cut will help loosen some of those bonds, by helping to firm up pricing and by giving Wall Street more confidence that it can count on Bernanke in a pinch.
That said, it’s worth remembering that the entire process could still take months — given the estimates of between $350-$450 billion in hung debt. Morever, the rate cut still puts LIBOR back at where it was just a few weeks back, as opposed to where it was a few months back (which would be preferable).
The early verdict? PE has been at a crossroads for the past two months, but the rate cut should help it finally inch forward. Slow and steady. Don’t expect a plethora of $20 billion buyouts anytime soon, but more modest deals should become more manageable.