Tags: leverage | buyouts | funds | loans

Leverage Returns to Corporate Buyouts

By    |   Friday, 14 June 2013 08:56 AM

If you thought the 2008-09 financial crisis spelled the end of leveraged buyouts, think again.

For example, the buyers of BMC Software, including Bain Capital and Golden Gate Capital, will pay only $1.25 billion of the $6.9 billion purchase price in cash, with the rest coming from debt, The Wall Street Journal reports.

That 18 percent cash-to-purchase-price ratio is the lowest of any buyout with loans exceeding $500 million since 2008, according to Thomson Reuters.

Editor's Note:
Billionaires Dump Stocks. Prepare for the Unthinkable.

Debt properly handled is what allows private equity firms to make big money. And debt handled improperly is what sends the financial system into meltdowns.

"When these companies do get over-levered, then they struggle to support their debt loads, and that will have an impact on their operations," David Breazzano, president of DDJ Capital Management, tells The Journal.

Individual investors have become enamored with funds that contain these leveraged loans (bank loan funds), pouring in at least $150 billion into them over the past 12 months, according to S&P Capital IQ's Leveraged Commentary and Data unit. Levered loans pay relatively high yields, approximately 4 percent, and are "floating" rate, which offers some defense if interest rates rise quickly.

But buyers beware. "Not all funds have the same risk profile, and investors should take that into account," Robert Dial, manager of the MainStay Floating Rate fund, told The Journal.

"Companies in floating rate bank loan funds typically are below investment grade, so there's additional risk," Dave Sekera, director of corporate bond strategy for research firm Morningstar, tells Newsmax's Private Opportunities newsletter.

But that means yields are higher than for investment-grade paper and will float upward if interest rates rise, he says.

Editor's Note: Billionaires Dump Stocks. Prepare for the Unthinkable.

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If you thought the 2008-09 financial crisis spelled the end of leveraged buyouts, think again.
leverage,buyouts,funds,loans
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2013-56-14
Friday, 14 June 2013 08:56 AM
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