Moulton Predicts Bankruptcies of Private Equity-Backed Companies in UK Will Rise

Jon Moulton, of Alchemy Partners fame, believes that between 50 and 200 Private Equity-backed companies in the UK are in danger of not being able to meet their banking covenants by this Christmas.

Obviously this prediction is targeted at those firms that were acquired using extreme leverage ratios during the two year plus credit boom preceding the crunch that began in August of 2007. A downturn will make it tough to cover interest payments using operating profit when you’re geared at 90%. It doesn’t take much clarevoyance to see that wave coming.

A study of the 124 largest buyouts from the 1980’s by Steven Kaplan and Jeremy Stein showed a default rate of 2% on buyouts organized prior to 1985, and a default rate of around 27% on buyouts organized in the second half of the decade which was when the high-yield bond market was at its most prominent. It will be very interesting to see how the 2000’s break down. Perhaps a shorter period of high default rate, but with higher rates of default? Time will tell.