S&P’s latest credit analysis blames this year’s skyrocketing default rate on a lot of things, but the most common thread is private equity. The report, titled “Default Autopsy Finds Traces of Private Equity DNA,” lists the usual suspects (bad economy, high energy prices, low consumer confidence, high cost of capital) as reasons the sharp rise in global defaults.
But the fact remains: Of the 55 defaults in the first eight months of this year, 70% were involved in transactions involving private equity.
The excuse S&P offers is one I don’t fully buy. The report explains that private equity firms want to buy cheap, therefore PE firms buy already-troubled assets, which is why they’ve got their hands in so many defaulting companies. For turnaround investors like Cerberus and Sun (who each have more than one ringer on this list), perhaps.
But otherwise, I call bullshit, considering the high premiums paid for even middle market companies in the most recent buyout boom. I’d say a majority of the PE-backed defaulters on this list weren’t intended to be turnaround stories.
However, the fact that sponsors understated their default risk exposure is certainly a contributing factor to the default rates, as the report states. Not many of us saw the credit crunch coming. (Ok, so I speak for myself there.)
But there is one uplifting caveat here (perhaps included to avoid an angry call from the Private Equity Council?):
While we expect to see more sponsors’ finger prints on the majority of the corporate defaults over the next 12 to 18 months, strategies and financing adopted by private equity sponsors are not always to the detriment of ailing companies and some may have already deferred or even averted defaults.
So its not necessarily private equity’s fault. Download the full report, which includes a spreadsheet of all 55 companies in default, here: spcredit.