Private equity firms are returning to the practice of using junk bonds and leveraged loans to take money out of the companies they own.
Investors’ renewed appetite for risk has made them willing to put money into those bonds and loans.
But the strategy poses some risks, as the debt built up by private-equity owned companies earlier this decade helped compound last year’s financial crisis.
As for the present, consulting firm Booz Allen Hamilton is seeking a $350 million loan to help pay for a $550 million payout to the Carlyle Group, The Wall Street Journal reports. The private equity firm bought Booz Allen in May 2008.
"Six months ago, this was unthinkable," Bryan Krug, portfolio manager of the Ivy High Income Fund, told The Journal.
But now, "There is a lot of cash chasing all asset classes, and it is allowing sponsors to opportunistically take advantage of the market," he said.
Some experts say the trend illustrates that the credit crisis is waning.
"It's one more sign of what's been a continual healing of the market. . . . There is more liquidity and appetite for risk," Tom Okel at Bank of America, told The Journal.
But some experts believe the risk rally is ending.
PIMCO Managing Director Bill Gross says junk bonds have peaked. “Yields are down to the 7.5-8.5 percent area. Typically and historically, those spreads are about as tight as they can get,” he told Bloomberg.
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