Credit boom: Private equity bounces back on cheap debt bubble

PRIVATE EQUITY dealmakers are riding high on a wave of cheap debt, pushing buyout values to levels not seen since the financial crisis.

The deals may not yet be quite as large as those in the last buyout bubble that blew up spectacularly a decade ago, such as the $44 billion buyout of energy company TXU that ended in one of the biggest bankruptcies on record.

But in one respect at least, 2007 is back: today’s deals are once again fuelled by supersized portions of cheap debt, with few strings attached.

Four leveraged buyouts worth $10 billion or more have been announced since the beginning of January, a higher tally than in any year since 2007.

The largest was Blackstone’s $17 billion acquisition of Thomson Reuters’ financial and risk business, now known as Refinitiv.

In about half of this year’s deals, private equity firms were able to raise debt financing amounting to at least six times the annual earnings before interest, tax, depreciation and amortization (Ebitda) of the company they bought.

Ebitda is a widely followed measure of profit that is calculated by taking a company’s headline earnings and adding back tax and interest payments, as well as non-cash charges such as depreciation and amortization. It provides a rough indication of the money available for debt repayments.

This year’s latest big buyout is the $13.2 billion takeover of the power solutions unit at Johnson Controls International by the private equity arm of Brookfield Asset Management, which plans to raise over $10 billion of debt — close to six times its ebitda.

Leverage on this scale has not been used so aggressively since 2007, when a sudden dearth of buyers for corporate debts meant banks were forced to clog up their balance sheets with risky loans they had originally planned to sell on.

Now a plentiful supply of cheap credit is once again pushing asset prices higher, allowing private equity bidders to offer more money upfront for every dollar of profit they expect a company to earn.

This is starting to raise alarm bells. Janet Yellen, the former chair of the US Federal Reserve, told the Financial Times last month that she was worried by a “huge deterioration” in corporate lending standards, particularly for leveraged loans. The IMF has also singled out leveraged loans as a potential source of financial instability.

In the US at least, Obamaera regulations until recently prevented businesses from ratcheting up debt even further. But private equity groups have taken advantage of the Trump administration’s more relaxed approach by doubling the proportion of deals done with leverage of seven times or greater, which had often been barred under the old rules.