Dec 6, 2018

Top private equity exec warns of credit "bubble"

Dan Primack, author of Pro Rata

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.

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Updates: George Floyd protests continue past curfews

Police officers wearing riot gear push back demonstrators outside of the White House on Monday. Photo: Jose Luis Magana/AFP via Getty Images

Protests over the death of George Floyd and other police-related killings of black people continued Tuesday across the U.S. for the eighth consecutive day — prompting a federal response from the National Guard, Immigration and Customs Enforcement and Customs and Border Protection.

The latest: Protesters were still out en masse even as curfews set in Washington, D.C., and New York City. Rep. Alexandria Ocasio-Cortez (D-N.Y.) slammed the New York Police Department late Tuesday following reports of police kettling in protesters on Manhattan Bridge.

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Election official at a polling place at McKinley Technology High School in Washington, D.C. Photo: Drew Angerer/Getty Images

In the midst of a global pandemic and national protests over the death of George Floyd, eight states and the District of Columbia held primary elections on Tuesday.

Why it matters: Joe Biden, the presumptive Democratic nominee, needs to win 425 of the 479 delegates up for grabs in order to officially clinch the nomination. There are a number of key down-ballot races throughout the country as well, including a primary in Iowa that could determine the fate of Rep. Steve King (R-Iowa).

Iowa Rep. Steve King defeated in GOP primary

Rep. Steve King. Photo: Alex Wroblewski/Getty Images

State Sen. Randy Feenstra defeated incumbent Rep. Steve King in Tuesday's Republican primary for Iowa's 4th congressional district, according to the Cook Political Report.

Why it matters: King's history of racist remarks has made him one of the most controversial politicians in the country and a pariah within the Republican Party.