Moody’s looked at 40 LBOs from 2006 to early 2008, the go-go days for buyouts. While a majority of the companies have seen their financial leverage drop, earnings and revenue growth for most have been “significantly below” projections, Moody’s said.
Exits for the bubble group have also been rare. In fact, most are still owned by their PE owners, the report said. Seven have completed IPOs and only one target has been sold (that’s Alltel. Verizon Wireless acquired Alltel in 2009; it had been owned by TPG and Goldman Sachs PE unit). Only five of the companies have paid “material dividends,” while three companies–Chrysler, Aleris International and Station Casinos– have filed for bankruptcy, Moody’s said.
Of the 40 companies, 15 are rated lower by Moody’s today than at their LBO closing. These include Hawker Beechcraft Acquisition Co., Energy Future Holdings (the former TXU), HD Supply and Ceasars Entertainment. Some companies, like Aramark Holdings and Travelport, saw their credit profiles weakened because of dividends they paid out, Moody’s said. But some companies, like HCA and Dollar General, improved their credit profile despite paying out dividends. These firms also cut their leverage by launching IPOs, Moody’s said.
The best bubble LBOs? Dollar General is one that actually performed reasonably well. KKR led an investor group to buy Dollar General in 2007 for about $7 billion. The discount retailer went public in 2009, raising $716 million. Dollar General has recorded the highest earnings growth in the group since its LBO at more than 100%, Moody’s said. Dollar General is also one of the six companies to see its ratings improve. The company’s corporate family rating was ‘Ba2’ at the end of November, up from ‘B3’ at the close of its LBO.
HCA, which launched a mammoth $3.8 billion IPO earlier this year, is also a winner. In 2006, an investor group that included Bain Capital and KKR, acquired HCA in a $33 billion deal. At the close of the LBO, HCA’s CFR rating was ‘B2.’ That rating improved to ‘B1’ as of Nov. 30, Moody’s said. HCA boosted its rating despite paying out major dividends to its PE sponsors, Moody’s said. Last year, HCA’s private equity owners received about $4.3 billion in dividends. The PE firms got another $1.7 billion from HCA’s IPO earlier this year, Moody’s said.
The worst bubble-era LBOs? Both Hawker Beechcraft and HD Supply have “unsustainable capital structures and are at high risk of default,” Moody’s said.