> Those companies are only at risk of insolvency if their debt is variable rate or has a balloon payment due soon.
Actually, most LBO-type deals are financed with a combination of bank and bond debt. A shocking number of bond deals will be maturing within 1-3 years, and have to be refinanced. The bank debt, senior to the bond issues, is typically variable-rate and (depending on deal size) split into tranches that must be repaid at different schedules over time. Many PE-backed borrowers in recent years decided not to enter into swap contracts to fix their debt rates. My understanding is that things could get ugly quickly if rates don't come down soon.
> Most PE deals would work (with lower returns) without any debt.
Actually, if a deal returns less than the yield on corporate debt of similar risk, then the deal does not work. LP's in the PE fund will correctly view it as a failure. The raison d'être of PE funds is to earn returns above those yields. Moreover, if a portfolio company is already loaded with debt, finding buyers that will pay the old multiples given the new rates will prove difficult, if not impossible -- similar to the situation many US homeowners that locked-in ~2% mortgage rates a few years ago face today: They cannot sell their home at the old valuation because prospective buyers are looking at mortgages that cost ~8%/year. Higher interest rates make it hard to impossible to "exit" at valuations that generate decent returns.
I'll believe it when it happens. Banks/creditors don't want to operate these assets (no expertise there) and since the businesses are fundamentally sound for the most part there is no reason to force them into bankruptcy. "Extend and amend" (sometimes "extend and pretend") is what they called it after 2008.
If they had unlevered yields below the corporate debt yield they would have negative leverage and debt would reduce returns.
Actually, most LBO-type deals are financed with a combination of bank and bond debt. A shocking number of bond deals will be maturing within 1-3 years, and have to be refinanced. The bank debt, senior to the bond issues, is typically variable-rate and (depending on deal size) split into tranches that must be repaid at different schedules over time. Many PE-backed borrowers in recent years decided not to enter into swap contracts to fix their debt rates. My understanding is that things could get ugly quickly if rates don't come down soon.
> Most PE deals would work (with lower returns) without any debt.
Actually, if a deal returns less than the yield on corporate debt of similar risk, then the deal does not work. LP's in the PE fund will correctly view it as a failure. The raison d'être of PE funds is to earn returns above those yields. Moreover, if a portfolio company is already loaded with debt, finding buyers that will pay the old multiples given the new rates will prove difficult, if not impossible -- similar to the situation many US homeowners that locked-in ~2% mortgage rates a few years ago face today: They cannot sell their home at the old valuation because prospective buyers are looking at mortgages that cost ~8%/year. Higher interest rates make it hard to impossible to "exit" at valuations that generate decent returns.