Debt-laden private equity deals will begin to unravel over the next year, reports the Guardian, citing insolvency experts at Ernst & Young. The complexity of transactions and the timing of debt repayments will undermine companies that under previous ownership structures might have survived.E&Y’s analysis of corporate buyouts and potential losses for investors is likely to increase pressure on private equity firms under fire from unions over job cuts, the newspaper said.
Keith McGregor, an insolvency partner at Ernst & Young, said the complex nature of many private equity deals was likely to make them more prone to collapse if they suffered a downturn in sales or increase in costs. “The quality of the debt has dropped off in the last few years. Debt with a CCC rating has a one in three chance of going bust within two years. But it is the fastest growing element of debt in private equity structures,” he said.
The situation would worsen next year when a significant increase in costs would begin to hurt companies when they needed to fund the second tranche of their debt repayments. “Around 90 per cent of the debt issued in the world is less than three years old. That means tranche two and three are still one and three years away from being repaid. There is no reason why the default rate will go up this year. I don’t think it will hit until 2008,” said McGregor.
