The new deal pipeline is nearly dry, and most of the exits are blocked. So let’s move on to what may become the buyout market story of 2008: Defaults.
In can be tough to predict which deals will or won’t go bust, but S&P gives us some breadcrumbs each month with its “Weakest Links” list of companies most in danger of debt default. My colleague Eamon Beltran has scoured the results, and found that at least 42 of the list’s 114 companies are buyout-backed. Here is what he put together, courtesy of Buyouts Magazine.
One of the two “weakest” ratings belongs to IAP Worldwide Services, a provider of military support services that’s majority-owned by Cerberus Capital Management. Apparently it violated its financial covenants twice last year (if only they’d done the deal in covenant-lite 2007 or 2008).
The other weakest link is hung around the neck of tomato grower Eurofresh Inc., which is backed by Bruckmann Rosser Sherrill & Co. But there is some upside here, as this investment was made just three months ago, and Eurofresh’s ‘CC’ rating is actually a February 1 upgrade from ‘D.’
The largest company on the list is Univision, which received a ‘B-‘ rating on $10.2 billion of affected debt. It had a ‘B’ going into March, but got downgraded due, in part, to a lower-than-expected sale price for its music division.
Between 1981 and 2007, 10% of all companies rated ‘B-‘ have ended up in default within a year of receiving that rating, while the same can be said for more than 25% of companies rated ‘CCC+’ or lower.
Here is the original S&P report: WL_March08_Premium.pdf
You can also take a look at a list of PE-backed companies already in bankruptcy protection.