It's almost a truism now that highly leveraged private equity buy-outs were a disastrous practice in the middle years of the decade. An S&P report out this week shows how damaging that practice has been.
Now Standard & Poor the rating agency has said that companies subjected to this practice make up more than half of the companies on its 'credit watch' list.
The list includes Freescale which was bought by private equity company Blackstone in 2006 and loaded up with $10bn of debt.
S&P said private equity firms have been involved in more than half of the 293 companies on its 'weakest links' list, which includes companies with credit ratings of B-minus or lower that have a negative outlook or have been placed on credit watch with negative implications.
"The vast majority of these entities were previously rated at higher rating categories but have seen significant deterioration in recent months," said the report. "Poor corporate earnings, an apprehensive consumer market and reduced access to capital have significantly eroded credit quality."
The S&P report says that 79 of the 140 companies that have defaulted in the last year had private equity involvement.
The report predicts that there would be more than 200 defaults in the
Top private equity lawyer Mark Spinner, head of private equity at international law firm Eversheds, told Private Equity News: "In my view it is not the fact that they have or will be downgraded by the credit rating agencies that will cause damage to the private equity industry, but the excessive gearing and thus higher risk incurred as a result of the complex and high leverage in many of these businesses which will reduce and/or eliminate limited partners returns for several years to come."
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