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Six of the 10 biggest LBOs that Moody's has tracked are considered distressed, and four of those have defaulted, according to the study, "$640 Billion & 640 Days Later: How Companies Sponsored by Big Private Equity Have Performed During the U.S. Recession." The report found that deals by Cerberus Capital Management LP and Apollo Management Lp have performed the worst among their peers. Four of Cerberus' six buyouts are in distress or in default, and about two-thirds of Apollo's companies are in equally dire straits. However, these firms have focused more closely on distressed targets than their peers covered by Moody's, including Kohlberg Kravis Roberts & Co., Blackstone Group LP (NYSE:BX), Welsh, Carson, Anderson & Stowe and Madison Dearborn Partners. Additionally, the revelation about problems in Apollo's and Cerberus' portfolios was already well known thanks to the high-profile bankruptcies of Cerberus' Chrysler LLC and Apollo's Linens 'n Things Inc. Overall, the findings of the Moody's study are not new. The Deal magazine's June 8 cover story, "The future and other problems," highlighted a McKinsey & Co. report that examined the state of 55 megadeals starting at $5 billion and up. The The Deal article explained: Already some big deals have gone bankrupt, such as Chrysler LLC, whose biggest investor was Cerberus Capital Management LP, aluminum maker Aleris International Inc. (TPG), Tribune Co. (Sam Zell) and Linens 'n Things Inc. (Apollo). Those four obliterated over $8 billion of invested equity. Others are hanging on, some just barely. What's more, even relatively sound enterprises like Energy Future could find it hard to escape default in a stingy credit market. The McKinsey take-away is very similar to the one put forth by Moody's. "These mega-deals continue to under-perform," said John Rogers, Moody's senior vice president. "As with Harrah's, the announced debt exchange at the former TXU is only the first step in addressing its over-leveraged capital structure." Only three of the biggest 10 LBOs remain above the distress level, according to Moody's:
Moody's report examined the performance of 186 rated LBOs sponsored by the 14 largest U.S. private equity firms. These transactions have experienced a 19.4% default rate since January 2008 -- similar to the 18.5% weighted average default rate for similarly rated companies, Moody's data showed. Unlike the rate of default, the number of LBO deals considered distressed -- rated B3 (negative outlook) or lower -- is significantly higher than for similarly rated companies. About one-fifth of LBOs are distressed, compared to only about 14% of general corporate issuers, Moody's data showed. The firms' levels of LBO distress or default ranged from as low as 15% to as high as 67%. "While firms like KKR appear to be better than others when examining the number of deals, the restructuring of the former TXU will have a much larger dollar impact on investors," Rogers said. Energy Future Holdings Corp., formerly known as TXU, is owned by affiliates of the private equity firms KKR and Bain Capital. Still, the Moody's study surely left some in the private equity world feeling unfairly targeted. And with buyout shops not needing any more negatives than the ones they already have the Private Equity Council, a lobbying group for the industry was quick to rebut the Moody's report's conclusions.At the top of the list on the PEC's problems with the report is that Moody's may be fudging the numbers. "Half of the private equity-backed company defaults captured by Moody's are not traditional defaults, but rather opportunistic transactions to deleverage companies," the PEC said in a statement. "When these defaults are taken out, the percentage of private equity companies in the sample that defaulted over the 21-month period falls to 10.2%. When annualizing this figure, the annual default rate for the private equity-backed companies in the study falls to 5.97%." Not only that but.. "Moody's claims that private equity sponsors have not injected capital into their companies. First this contention is untrue, as Preqin estimates that private equity funds have raised and invested $3.3 billion of equity capital to support existing portfolio companies. Secondly, this criticism ignores the fact that the debt buybacks Moody's classifies as defaults can do more to reduce a company's leverage ratio than equity." Moody's will hold a teleconference on Friday beginning at 11:00 a.m. EST to discuss the report. - Matthew Wurtzel
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Wait, where is the Rah Rah puffery of the typical Deal LBO article?
The only reason people continue to write positive pieces on the LBO industry is because of the fees, and no other reason!
Substantively, the LBO market in no manner furthers or extends the viability of the American economic system. Real men build companies, charlatans do in fact transact in the LBO arena with the sole purpose of paying themselves Special Dividends, and fees.
The facts are the facts and no amount of genuflecting makes them any different!