Moody’s today released a study on the performance of debt on 86 bubble-era mega-deals. Guess what? Just like the crap-performing mega-deals of bubbles past, their debt doesn’t look so hot.
As Henry Kravis would say, that’s just the nature of the beast.
peHUB has obtained permission to post the entire study, called $640 Billion & 640 Days Later. Download it below.
Of course, any study on private equity performance from ratings agencies takes a necessarily narrow view of the situation. It focuses on on company debt, which looks bad, but doesn’t reflect the performance of the overall investment. As my colleague Megan Davies pointed out this morning, the investment can be a success regardless of the company’s debt level. In fact, many of the companies which Moody’s classifies as “defaulted” only earn that title because they’ve done a debt-for-equity swap. Lenders usually take a hit on those deals, but the company typically remains unscathed, not to mention, it preserves a buyout fund’s investment.
All that said, it’s notable that Moody’s singled out Apollo and Cerberus as having the riskiest, worst-performing debt on their deals. Apollo clearly disagrees with Moody’s warning, since in past year it has been voraciously eating its own cooking, buying up loads of debt of its own portfolio companies.
Moody’s also piles on with warnings about the ridiculous wall of looming debt maturities everyone’s been freaking out about for the past six months. Nothing new here (especially considering that’s the entire theme of Josh Kosman’s book), unless Moody’s wants to be sure it can join the chorus of “Told you so’s” if it actually does happen.
However. The study has a few notable highlights that the mainstream press has yet to pick up on:
Dividends aren’t all that risky.
Among the 186 private equity deals in this study, sponsors took out dividends on 44 LBOs. Yet this group of deals actually boasted only six defaults-a 13.6% rate, lower than the rates for the entire 186-LBO study (19.4%) or for other, similarly rated companies (18.6%).
PE defaults aren’t more common than regular company defaults.
Companies affiliated with the 14 largest private equity firms have experienced similar rates of default to other companies over the course of the January 2008-September 2009 period of our study-a 19.4% rate of default among private equity firms, compared to a rate of roughly 18.6% for similarly rated companies. (See box, page 3, for an explanation of how we made this comparison).