Some of the most controversial financing practices of the credit-bubble years have returned, stoking fears that debt markets are growing overheated.
“We have had a huge rally in debt,” Dino Kos, a former New York Federal Reserve Bank official and now a managing director of Portales Partners, told the Financial Times. “Everything needs to be just right for that rally to be validated.”
Bloomberg reports that private-equity firms are returning to the high-yield, high-risk, debt market for acquisitions and dividend payouts little more than a year after the global default rate for speculative-grade companies rose to the highest since the Great Depression.
One example: The dividend recap initiative involving the Booz Allen Hamilton consultancy, which is arranging $350 million in loans that is likely to help pay a $550 million dividend to its owner, private equity firm Carlyle.
Carlyle is seeking to take advantage of a record rally in high-yield, high- risk loans to take cash out of companies they bought last year amid the financial crisis. A Carlyle spokesperson said that after the proposed dividend, Booz Allen would have less leverage than when Carlyle bought it.
Similarly, air-conditioner systems manufacturer Goodman Global has asked lenders to allow a payment of as much as $115 million to its owner, the private-equity firm Hellman & Friedman.
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