New York – While shareholders are cashing in big during the current buyout boom, investors holding what had long been considered the least-risky corporate bonds are taking a surprising bath.
It’s all about leverage. These days, most takeovers add lots of debt to acquired companies’ balance sheets, and the result has been credit-rating downgrades of high-quality corporate securities to junk levels.
This wasn’t the way things were supposed to go for investors, many of which are pension funds and mutual funds. They thought they were buying safety with investment-grade corporate bonds, which have a low risk of default.
What they failed to appreciate is that many of these bonds don’t carry any covenants or change- in-control provisions that would have allowed them to cash out at a favorable rate before a takeover could be completed.
Few expected that such protections would ever be needed, given the credit profile that companies long had to maintain to be eligible to borrow funds.
But that idea has been turned on its head in the past year.
Companies that want to borrow money don’t have to look far, thanks to the combination of low interest rates and ample liquidity sloshing around financial markets.
That has made these good times for buyout firms, which have used massive amounts of debt to finance deals to take public companies private.
The availability of such leverage has allowed them to go after companies that not long ago seemed to be too large to scoop up.
So far this year, there has been $166 billion in leveraged-buyout lending globally, up 40 percent from the $118 billion seen during the same months in 2006, according to Dealogic.
