Rather than addressing the underlying problem of too much debt, private equity firms’ refinancing of debt at their portfolio companies is simply extending the problems out to some point further in the future, say distressed investors.
“Many of these companies are able to service their debt,” said Jeffrey Aronson, managing principal at Centerbridge Partners. “They can pay the monthly Visa bill. The real question is, can they pay it back?”
Tennenbaum seemed to think the answer to that question is no, arguing that when these companies have taken on new debt, it has gone mostly to pay down existing bank debt - not to growth, or to somehow making a company’s model more defensible. And in many cases, companies have been replacing bank debt with high-yield bonds which, while maturing later, have a higher interest rate.
“More cash is going to get clawed up” to pay the interest rates on that debt, Tennenbaum said. He said the new debt is levied at an interest rate of around 10%, versus 4% on the old debt.
“I think this cycle is going to have a long tail,” Aronson said. “You haven’t really seen many of the buyouts hit the wall. At the DBR Restructuring and Turnaround Summit on Wednesday, they used a variety of colorful anecdotes for what PE firms are doing, ranging from the now common “extend and pretend” and “delay and pray” descriptions to some more creative phrases.
“The longer you kick the can down the road, the nastier the can gets,” said Michael Tennenbaum, senior managing partner of Tennenbaum Capital Partners.
“[They] kicked the can down the road, and everyone realizes that it’s the same old battered can,” said Angus Littlejohn, chairman and chief executive of Littlejohn & Co.
Read more at WSJ.
Canadian ABL lenders in the private equity indsutry are having the busiest time of their lives. Business owners still prefer to have the debt rather than give up equity and are using debt to pay off their short term debts and keep going business-as-usual rather.