A boom in corporate acquisitions made by private equity (PE) firms in the boom years before the 2008 financial crash could undermine the stability of the UK financial system and trigger the next major crisis, the Bank of England (BoE) has warned.
In its quarterly bulletin, the BoE said that the leveraged buyouts that characterised the boom years used significant amounts of borrowed money to finance deals and these are likely to unwind in 2014 as more debts mature.
“It is clear that leverage of the UK corporate sector has increased as a result of larger PE acquisitions [and] the resulting increase in indebtedness makes those companies more susceptible to default, exposing their lenders to potential losses,” the BoE commented.
“Such companies pose a risk to the stability of the financial system – a risk that is compounded by the need for companies to refinance debt maturing over the next few years in an environment of much tighter credit conditions.”
In addition to the increased risk of companies collapsing, the risk to the UK financial system from these debt levels was further compounded by the costs of financing the debt, making companies less likely to undertake long-term investment it added.
“The average maturity of UK leveraged buyouts [LBO] debt is around seven years. Given that the peak in debt issuance was around 2007, there is a significant ‘hump’ of maturities from 2014,” the BoE noted. “As it currently stands, £32bn of LBO debt is expected to mature in the period 2014-15, with a further £41bn in the period 2016-18.”
The report acknowledged that while as yet there is no clear evidence of a higher default rate among PE-owned companies, the poor performance of loans to PE-sponsored firms since the crisis began was a concern. “A more complete picture on the success or failure of companies bought out at the peak of the lending boom might not become clear for many years,” the BoE added.
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