The purpose of high leveraged buyouts is to allow companies to make large buyouts without having to invest a large amount of capital. However, the recent credit crunch has created an unusual problem for the companies in UK that had resorted to high-leveraged buyouts to acquire companies in the retail and housing sector by driving down the market value of their debts. Among the companies who have lost investor’s confidence are the specialist retailer, Fat Face, the house builder, Crest Nicholson, the estate agencies, Foxtons and Countrywide. Their equity value has touched insignificant levels.
During the bull market run the private equity firms acquired businesses using huge amount of debt and investing in lower level of equity, pushing up valuation of debts. However, with the expected slowdown in consumer spending following the recent credit crunch the retail and the housing sector is expected to see their revenue plummeting. Under such circumstances, the senior debt of firms like Crest Nicholson, for instance, that was acquired by HBOS and West Coast Capital for ₤715 million in 2007 is trading for 50p, and its junior debt is trading between 40p to 50p in the pound.
We have seen in the past that indulgence in excessive debt financing in high leveraged buyouts has resulted in corporate bankruptcy. In 1988 Robert Campeau’s buyout of the Federated Department Stores and the 1986 buyout of the Revco drug stores had created similar problems. The craze of the high leveraged buyouts had dwindled since the early 1990s but it had once again attained popularity since 2006 when the global equity markets were witnessing a bull run. The increase in debt frequently pushes the ratings of the acquired companies’ debt lower and they often end in speculative junk status. This badly affects the investors who earlier bought the high-grade bonds to avoid speculative risk.
The dismal high leveraged buyout scenario has acquired a global dimension. In USA itself after pumping $650 billion in the US economy over the past two years, the number of deals is shrinking. Buyout executives are canceling deals already signed and renegotiating other at marked-down prices.
Source:timesonline
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