"I think of this as a debt bubble, not a private equity bubble," Landry (AP note CEO of TA) says. "That's the horse, and we're the cart." Debt markets that finance private equity transactions have changed in three important ways. They are charging lower interest rates, reducing the premium normally charged for greater risk. They are lending more money for the purchase of an operating company, exceeding normal caps based on the cash generated by the acquired business. Finally, debt markets are reducing or virtually eliminating covenants and other rules that now make it almost impossible for private equity investors to default on loans used to buy companies.
Got that? Low rates, more leverage, practically no conditions. How do you think that story is going to end?
"The reality is the markets are willing to provide extraordinary amounts of debt, almost indiscriminately," says Scott Sperling , copresident of Thomas H. Lee Partners, the big Boston private equity firm. "It's hard to put these companies into default. I can't think of the last time we had a real covenant in one of our deals."
There is another issue beyond default of course. Exit valuations will go down if this type of financing goes away.
From the Boston Globe