Four Of Top Ten Private Equity Deals In Default, Or Worse

The private equity business has been unkind to the firms that have done the largest LBO deals of the last year. That only makes sense. Leverage has been beaten down by the recession. PE firms assumed that large debt loads would be paid down from cash flow at the companies that they bought. Those assumptions did not forecast the worst recession in seven decades.

New Moody’s data shows that the ten largest private equity deals of all time are performing worse than comparable companies that were not bought out.

The New York Times reports that, “Four of the 10 companies have defaulted on their debts, one is about to, and at least three have done special deals — called distressed exchanges — to reduce the debt loads placed on them by private equity transactions.” Cerberus and Apollo have the worst performance among the large PE firms.

The Moody’sreport covered the period from January 2008 until September 2009.  Harrah’s, Chrysler, Clear Channel Communications, and Freescale Semiconductor have all turned to Chapter 11 or have defaulted on debt.

What Moody’s does not say explicitly is that the problem is bound to get worse. There is little reason to believe that the current credit market is an easy place to get new debt financing, at least not without paying higher rates. There is also no reason to believe that the economic rebound in 2010 is likely to be robust enough to help companies which have cash flow well under their debt service costs.

PE has almost certainly seen its best days. Now the people who run the firms that did the LBOs can spend their time trying to fix companies that were created using a broken model.

Douglas A. McIntyre