High risk debt issues begin to fail

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I know that the issue is a bit dark, and at the moment it is not having much relevance, but today I read in Good Finance and in the IE Finance Weblog that high-risk debt issues to acquire companies from private equity funds are beginning to give the first signs of weakness (Good Finance Insurance (GFI), has had to cancel plans to increase financing through debt for the purchase of the retail company Maxeda).

Financial world of grouping debts into packages


It seems that the holy grail that had discovered the financial world of grouping debts into packages (GFIs for buyouts and GFIs for mortgage loans) that offered high returns with an excellent credit rating is beginning to falter.

As we mentioned in this post, the GFIs have had a spectacular increase in volume in recent years, in this post of IE Finance Weblog they leave us the graphic that I attached that I understand is quite visual.

Leverage the purchase of many companies


I have little doubt that the success of GFIs is one of the great factors that has allowed private equity companies to aggressively leverage the purchase of many companies, paying multiples until recently unknown (in this post I indicated the evolution of multiples paid by private equity in recent years).

Bank financing proposal 


For example, without going any further in the sale of Applus, the sales notebook already comes with a bank financing proposal of 12 times the company’s Editha, so if the private equity firm puts some capital we are going to a 14-16 times its Editha rating. And how can the puncture of the GFIs affect this to the rest of the mortals?

Well, I don’t know who the egg is or who the chicken is, but I’m afraid that the current multiples that many public companies are quoting are supported by the multiples that private equity is paying in their operations.

If they cannot now leverage so much when buying a company, it would be logical to expect the acquisition prices to fall and perhaps also the valuation of the listed companies suffers. It is not that I am seeing a catastrophic scenario or predicting the end of the world, but something tells me that one day we should return to normal.

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