Flash Update: The Financial Times reports buyout debt returns to pre-crisis levels in the US

Typically in the late stage of any boom market there is an over-extension of debt and leverage.  In a research piece we distributed yesterday, we showed how leverage in the high yield sector, as defined by the Fitch Credit Services, has reached levels far outstripping pre-crisis levels. 

In an unrelated piece yesterday, The Financial Times reported that private equity funds have tapped the “buoyant credit markets” to levels not seen since the boom years before the financial crisis.  As reported by FT, at September 2013 levels, the debt component of US private equity deals has reached 5.3 times EBITDA.  “This is the highest ratio since 2007, when the average debt proportion reached 6 times EBITDA, and surpasses the 2006 level of 5.1 times EBITDA.  Six years ago, such ratios were symptomatic of a credit bubble,” writes the Financial Times.  “(This is) starting to lift valuations artificially.”

However, we note that while PE firms appear to be leaning heavily on leverage to drive the deals of today, they are merely approaching pre-crisis levels.  By comparison to managers of high yield companies, PE dealmakers appear to be almost judicious in their use of leverage.  By comparison, in our research note, we see that the high yield sector has already dramatically outstripped pre-crisis levels.  For example, as measured by Total Debt to Market Capitalization, leverage has now reached 113%.  Ten years ago this ratio was 54% and rose to become 78% at the height of the debt crisis in 2008-2009.

While the data shows their use of leverage did pull back in 2010 and 2011, high yield companies appear to have short memories.

Tradex Global Advisory Services, LLC

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