Jul 28, 2021 - Economy & Business

Lenders aren't repeating their past private equity mistakes

A piggy bank.

Illustration: Aïda Amer/Axios

Bankers have a reputation for being coin-operated — eager to bend reality on behalf of high-paying clients. Unlike in past boom times, however, they're currently holding the line on contortion.

Why it matters: Private equity-owned businesses are more likely to weather an economic downturn than they were before the Great Recession, which protects both jobs and limited partner investments.

By the numbers: Average debt multiples for U.S. leveraged buyouts were 5.9x for the first half of 2021, according to S&P Global Market Intelligence’s LCD. That's slightly higher than the 5.7x mark for 2020, but still below the recommended ceiling set by the Treasury in 2013.

  • Average interest coverage ratios, which refer to EBITDA vs. interest, were 3.5x for both 2020 and the first half of 2021. They were only 2.1x back in 2007.
  • If you look at fixed charge coverage ratios, which subtract capital expenditures from EBITDA, multiple sources say it's been sticking close to 2:1. Before the Great Recession, it was 1:1 (or sometimes even less), which meant companies had virtually no wiggle room if things went south.
  • Caveats: There can be a tendency to play fast and loose with earnings calculations, creating what my colleague Kate Marino refers to as "fake EBITDA." It's also true that banks continue to give very loose leveraged loan terms, particularly when it comes to covenants.

The bottom line: Lenders are saving private equity from itself, and that could pay off for everyone in the end.

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