In the next three years private equity sponsors expect up to 20 percent of their corporate investments to violate debt rules or go through a debt restructuring process, according to a new study by the law firm Cadwalader, investment bank Rothschild and Debtwire.
Of the 12 European private equity investors interviewed, half said they expect a new wave of corporate failures in the second half of 2007. An additional 33 percent said the failures wouldn’t start until 2008. “While consensus is lacking as to exactly when, or why, the next restructuring phase will start, there appears little disagreement among distressed (debt) investors regarding the inevitability of a correction and the likely substantial number of distressed opportunities that will follow from a record number of leveraged deals,” says Richard Nevins of Cadwalader.
The survey states that only a small amount of the investors thought corporate debt levels may still rise because of the increasing amount of liquidity in the market.
“Private equity practitioners have thus far been able to test the market and continue to push leverage multiples higher, despite the fact that so many funds may not be able to support that much debt,” according to the survey.
Currently debt levels represent about 75 percent of a company’s enterprise level. “They will fall once several high profile corporate failures have occurred and enough banks and private equity firms have lost significant amounts of money,” according to the survey.