LBO fears overdone

The high-yield market looks cheap and nobody wants to buy. Analysts at Citigroup beg to differ, arguing that the sell-off is overdone despite all the losses on ISS (a Danish cleaning company being acquired for US$3.8bn).

“Although private equity funds are flush with money, only a tiny fraction ever affects credit. Neither a GM downgrade nor inflation make us bearish on credit spreads,” said Citigroup analyst Matt King. “With positions having fallen significantly, we think this is a buying opportunity.”

The stance runs in the face of the headlines, but occasions like ISS, where public companies are taken private, are in a minority. Even on these occasions, less than half are large enough to have publicly quoted equity or bonds outstanding.

Citigroup is forecasting around US$400bn of private equity investment globally, with only 3% of transactions involving the taking-private of public companies with a market cap of over US$1bn.

“This implies a mere US$10bn or so each year in buyouts of companies which trade in global bond markets, and perhaps one transaction a year in Europe,” King said.

Citigroup said that, in all, LBO risk was a reason for bond investors to diversify portfolios, not to short the market as a whole. It expects the impact of a GM downgrade to hit Europe harder than the US, affecting around 16% of the market.