Dec 6, 2018

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.

Go deeper

The race to catch Nike's Vaporfly shoe before the 2020 Olympics

Illustration: Aïda Amer/Axios

Four months ago, on the very same weekend, Eliud Kipchoge became the first human to run a marathon in under two hours, and fellow Kenyan Brigid Kosgei shattered the women's marathon record.

Why it matters: Kipchoge and Kosgei were both wearing Nike's controversial Vaporfly sneakers, which many believed would be banned because of the performance boost provided by a carbon-fiber plate in the midsole that acted as a spring and saved the runner energy.

Reassessing the global impact of the coronavirus

Illustration: Aïda Amer/Axios

Economists are rethinking projections about the broader economic consequences of the coronavirus outbreak after a surge of diagnoses and deaths outside Asia and an announcement from a top CDC official that Americans should be prepared for the virus to spread here.

What's happening: The coronavirus quickly went from an also-ran concern to the most talked-about issue at the National Association for Business Economics policy conference in Washington, D.C.

Tech can't remember what to do in a down market

Illustration: Rebecca Zisser/Axios

Wall Street's two-day-old coronavirus crash is a wakeup alarm for Silicon Valley.

The big picture: Tech has been booming for so long the industry barely remembers what a down market feels like — and most companies are ill-prepared for one.