REVENUE STRATEGY - PRIVATE EQUITY FIRMS

1. Private equity firms are borrowing unimaginable sums to pay for their record deals because of low interest rates, cash-flush lenders, and the belief that healthy corporate earnings and cutting-edge management mitigate risk.
2. Now average debt levels are a record 5.9 times cash flow of the target company, and debt multiples of eight or nine times are common.
3. Even weaker companies can live with high debt for now because they face few loan conditions that can trigger a default - and if they get into trouble, someone else lends them more money. But high leverage ratios could hurt companies with weak businesses, especially if interest rates rise or the economy weakens.
4. Some private equity firms have stripped too much value from some companies, leaving them ill-equipped to operate their businesses. About 11% of proceeds have been for capital expenditures to enlarge the business, with the rest going for sponsor dividends, stock buybacks, refinancing of existing debt or LBOs.

But:
Default rates have started inching up. The default rate on U.S. corporate debt is 1.44%, up from 1.26% at the end of 2006.

“And if the dam breaks open many years too soon
I’ll see you on the dark side of the moon” – Pink Floyd.

[Click here for full story at: BUSINESSWEEK.COM]