The Debt-Rich '00s?

by: Yaser Anwar

On Sunday morning I came across an insightful article pertaining to recent buyouts, their increasing debt multiples and falling interest coverage ratios- reminiscent of the debt-rich 80s and one of my favorite books, Connie Bruck's The Predators' Ball: The Inside Story of Drexel Burnham and the Rise of the Junk Bond Raiders. As the amount of money flowing into the industry grows, so have deal sizes and leverage ratios. This article looks at the numbers showing that coverage ratios have been tightening on recent leveraged buyouts.

"In previous cycles, low coverage ratios meant trouble. The highly geared LBOs of a generation ago tended to have extremely tight coverage ratios that were often precursors to defaults.

...coverage ratios of recent LBOs hovering around 1 have become more common, eliciting a series of overheated stories in the press. The Deal's examination of recent deals — both large and small — indicates ratios are dipping to the point where companies come out of LBOs producing just enough Ebitda to cover interest expense and capital spending.

Today's debt multiples, however, have reached levels not seen since the notorious debt-rich '80s. While it may be true that larger, more established companies with prominent brands can claim mitigating circumstances that afford them flexibility, not every company has the same luxury."

The US & UK dominate the private equity markets, both for raising funds and attracting buyers for their companies. Despite its much smaller size, Canada is also seen as a good place to do deals, ranking fourth in the world behind Australia for its private equity environment, according to a study done this year by Apax Partners and the Economist Intelligence Unit.

The downturn in the stock markets after the tech bubble, combined with lower returns from fixed-income investments, such as government bonds, has led investors, including pension funds and family endowments, to seek out alternative assets, including real estate, hedge funds and private equity.