Top private equity exec warns of credit "bubble"
Apollo Global Management's Leon Black yesterday sounded the leverage alarm, while speaking at a Goldman Sachs conference:
"The credit markets, unlike the equity markets, have gone to bubble status. The amount of covenant-less debt is more than 2007. You have a thirst for yield that exists on a global basis. So there is true excess."
Black's comments came just hours after Moody's published a report on the "alarming" number of private equity-backed companies with poor credit ratings, suggesting an "elevated" risk of bankruptcies when the economy turns south and investor sentiment sours.
- Moody's reports that around 90% of PE-backed debt issues are rated B2 or lower, compared to just 40% of spec-grade companies without PE sponsorship.
- But, right now, creditor recoveries are fairly similar for companies with and without private equity sponsors.
It also comes as debt multiples are on the rise for private equity companies. S&P LDC provided Axios with data showing that debt-to-EBITDA multiples for private equity deals are at their highest average levels since 2007.
- The year-to-date figure is 5.8x, up slightly from 5.7x for all of 2017 and a big climb from the decade-low of 3.8x in 2009. In 2007 the figure was 6.1x.
- LBO purchase price multiples of EBITA are down slightly from 10.6X last year to 10.5X so far in 2018, although it's the fourth straight double-digit year. In 2007 it was 9.7x.
The bottom line: Private equity didn't cause the last recession, and it won't cause the next one. But when the fall comes, it hasn't given itself much of a cushion.