I'm guessing we will be seeing more bankruptcies among the 2009 - 2022 cohorts,
From The American Sun, Apr 30, 2024:
During the pre-COVID era of zero interest rates, companies took advantage of the favorable borrowing conditions to go private. Many others took on debt to go on an acquisition binge. This was the end of the long secular decline in interest rates that sparked M&A and LBOs in the ‘80s. That game is over. As the economic landscape shifts and interest rates rise, these companies face significant challenges when it comes to refinancing their debt. We can review the difficulties companies taken private during the zero interest rate pre-COVID era face in today's higher interest rate environment and guess whether this could lead to bankruptcies.
One of the primary challenges for companies taken private during the zero interest rate era is the increased cost of servicing their debt in a higher interest rate environment. We hear this about the federal government, but this hurts corporations, too. With interest rates elevated, companies face higher interest payments on their existing debt. This can strain their cash flow and profitability, especially if they have a significant amount of debt maturing in the near term. Add on top of this the need for firms to roll over debt they accrued before the rate run up, and the 5-7 year timeline for refinancing comes due soon. Firms face a market with interest rates well above the average for 2017-2021.
Rising interest rates also make it more difficult for companies to refinance their existing debt from the supply side. In a higher interest rate environment, lenders are more cautious and demand higher interest rates or impose stricter lending terms. This can make it challenging for companies to find lenders willing to refinance their debt on favorable terms, particularly if they have a high level of leverage or poor credit quality. All of those privatizations involved turnaround plans, which usually focus on cost cutting, but who has seen their margins wrecked by inflation. Who had pricing power? This adds an extra wrinkle.
Companies taken private during the zero interest rate era may have structured their debt with longer maturities to take advantage of low interest rates. Once again, this gets into the issue of how long was long term. A problem, as interest rates rise and stay higher, is that they may find themselves with a maturity mismatch, where their debt matures before they are able to refinance it on favorable terms. Most privatizations have a plan to IPO after the efficiency gains, tech improvements and market expansion. If they cannot, they either sell to some other private buyer or refi. Problems pop up with that monthly nugget even for corporations when facing 8% rather than 4%. This can create liquidity pressure and increase the risk of default or bankruptcy.
Higher interest rates can also impact the valuation of companies, especially those with high levels of debt. As interest rates rise, the cost of capital increases, which can lead to lower valuations for companies with large debt burdens. This can make it more challenging for companies to raise equity capital or attract investors, further exacerbating their financial difficulties. It is also not like these firms have generated so much cash that they could go to the market and buy their now cheaper bonds at well below face value....
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"US private equity portfolio company bankruptcies spiked to record high in 2023"
Following on yesterday's "The Guy Who Wrote “An Inconvenient Fact: Private Equity Returns & the Billionaire Factory” Does Not Genuflect At The Alter Of Bain, Carlyle and Blackstone"
Sometimes it's hard to tell the difference between a bankruptcy bust-out/bleed-out fraud and private equity.
Also between private equity with its internal rate of return, IRR, and piracy with its eerily similar Arrgh, but that's a whole 'nother post.
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A “bust out” is a fraud tactic used in the organized crime world wherein a business’s assets
and lines of credit are exploited and exhausted to the point of bankruptcy — Wikipedia.
—"Retail’s Existential Threat? Private Equity Firms", April 26, 2019
