Commentaries

from Neil Unmack:

Bond investors won’t bail out private equity

Neil Unmack

Aug 5, 2009 15:55 UTC

Private equity and European high-yield bond investors have an awkward relationship. Investors recoiled from the market after telecom companies went bust in the dot-com crash. Issuance picked up during the recent credit boom, but PE firms raised most of their funding through private bank loans, many of which were repackaged into collateralised loan obligations (CLOs).

Now that banks won't lend and the CLO machine is broken, financial sponsors need to find a way of refinancing the hundreds of billions of euros of loans that will come due over the next five years (S&P estimates over 500 by the end of 2015).

Just in the nick of time, investor interest in European high-yield bonds seems to be reviving. Investors are increasing their allocation to the sector, enticed by juicy returns as the market rallied after the credit market collapse last year. So far this year, high-yield issuers have managed to raise over eight billion euros, and bankers are hoping that companies who haven't issued before will be able to come to market soon.

The great hope for PE firms is that this resurgence will allow them to refinance maturing debt, probably by issuing senior-ranking high-yield bonds to refinance a portion of senior bank debt, and extending the rest.
Certainly, the high-yield market will help, but PE firms and banks hoping to pass the buck by dumping overleveraged companies on the bond markets will have a hard time.