Domestic LBO Defaults Make Up 25% Of Global Total

The United States is leading the world in credit defaults, and companies backed by U.S. buyout shops are responsible for more than a quarter of the world’s corporate carnage.

As of May 29, the U.S. trailing 12 month speculative-grade default rate stood at 8.25 percent, well above the 6.19 percent global figure, according to ratings agency Standard & Poor’s

Meanwhile, of the 140 global defaults tracked by S&P this year through May 31, at least 36 of them, more than 25 percent of the total, were perpetrated by portfolio companies of U.S. buyout shops, according to further analysis by Buyouts.

“The precipitous increase in defaults reflects a pronounced decline in economic fundamentals and earnings prospects, as well as the continued credit freeze, effectively halting lending to speculative-grade borrowers,” S&P said in a Global Corporate Default Update dated June 5.

“A large number of defaults likely will be concentrated in the first two or three quarters of 2009 as a result of these factors, coupled with distressed exchange offers,” the ratings agency added.

Indeed, S&P expects the U.S. speculative-grade default rate to balloon to 14.3 percent by the end of first-quarter 2010, a rate basically sandwiched between the ratings agency’s pessimistic forecast of 18.5 percent and its optimistic outlook of 11.5 percent.

With even the optimists pointing to a double-digit default rate by next April, it is worth pointing out that the volume of defaults on a global basis did ease up in May. The 34 defaults that S&P tracked last month represented a 22 percent decline from April’s 44 global defaults.

But buyout shops are still in the hot seat, as LBO-backed issuers were still strongly represented in the mix of troubled companies. Of the 34 global issuers that defaulted last month, at least eight of them, nearly one-quarter of the total, were portfolio companies of U.S. sponsors at the time of default, according to further digging by Buyouts.

Among that recent class of defaulters was Sun Capital Partners’s Mark IV Industries Inc., a supplier of automotive and heavy-duty truck equipment that voluntarily filed for Chapter 11 bankruptcy protection on May 1 with more than $1 billion in debt and assets of up to $500 million. Sun Capital acquired Mark IV in March 2008 from London buyout shop BC Partners.

Elsewhere, Lazy Days’ R.V. Center Inc. defaulted on its $137 million, 11.75 percent senior unsecured notes after the Bruckmann, Rosser, Sherrill & Co.-backed seller of recreational vehicles failed to make an interest payment on May 19. The New York buyout shop originally acquired the Tampa, Fla.-based company in May 2004.

Packaging maker Berry Plastics Group Inc., meanwhile, defaulted on May 22, after the Apollo Management and Graham Partners-backed company repurchased its own debt in a deal considered by S&P to be a distressed exchange, which is tantamount to default.

As for the leading causes of default on a global basis, nearly 40 percent of all defaults tracked by S&P in 2009 were due to missed interest and/or principal payments. Bankruptcies, including, but not limited to Chapter 11 filings, accounted for 30 percent of defaults in the first five months of the year, followed by distressed exchanges, which made up 27 percent of the total, according to S&P.