BUYOUT BONANZA
LBO feast expected as Trump alters debt rules
The next buyout boom may be ready to start.
A President Trump-appointed regulator last week lit the fuse on what some on Wall Street believe will become an explosion of private equity-fueled acquisitions — perhaps equaling the buyout bonanza of 2006-07.
There were $1.5 trillion in leveraged buyouts in those two years, according to Dealogic. Since then no two-year period has come close.
In 2016-17, for example, LBOs slumped 47 percent, to just $809 billion.
Deal insiders believe the next buyout boom will start shortly now that the Trump administration has rolled back an Obama-era rule that limited debt on LBOs to six times a company’s Ebitda.
Trump’s Comptroller of the Currency, Joseph Otting, last week did away with a rule that some thought wise because it didn’t saddle companies with too high a debt burden.
In the 2006-07 boom, before debt levels were limited, three of the seven largest LBOs went bust — including radio station giant iHeart Media, which is expected to file Chapter 11 any day.
Otting’s new rule, announced at a conference last week, provides banks the“right” to lend at any level if they are not risking their “safety and soundness.”
It’s a very significant statement, Kramer Levin Partner Rich Farley, who heads the law firm’s leveraged finance group, told The Post.
“When the chief regulator of national banks says lever- age levels won’t be secondguessed after secondguessing and browbeating banks on leverage levels for five years, that qualifies as a sea change.”
For private equity firms, debt is like jet fuel.
PE firms buy companies with little money down — using other’s cash to structure acquisitions like mortgages.
But the PE firms are not saddled with the debt — they have the businesses they buy take the loans.
If business conditions go south — as they did with iHeart and Caesars Entertainment — it is the company that is responsible for repayment.
The track record shows that large leveraged buyouts often end in bankruptcies.
In addition to the imminent filing of iHeart (formerly Clear Channel), the failures of the 2006-07 buyout boom include Energy Future Holdings (formerly TXU) and Caesars (formerly Harrah’s).
During the debt-restricted era, PE giants like KKR and Blackstone Group have been licking their chops — and building their war chests — but not spending much of their money.
LBO firms have built up a global war chest of $633 billion in cash as of the end of 2017, according to Bain & Co. Combined with leverage, LBO firms have roughly $2 trillion of firepower to put to use.
“During 2017, more than 38,000 companies were bought and sold globally, but PE accounted for less than 10 percent of those deals,” Bain & Co. said in its report.
During 2006-07, PE represented 20 percent of deals.
PE firms have historically cut costs to improve earnings, according to the Bain & Co. report, but may have to change their strategies with interest rates rising and a looming recession.