More than half of companies identified recently as multiple defaulters by Standard & Poor’s have been linked to alternative investors, such as buyout funds.
“An enormous debt load, often resulting from multiple acquisitions, was a huge financial risk factor we frequently observed,” S&P reported. “A number of serial defaulters in our dataset underwent leveraged buyouts in the 1980s, which caused their financial risk to balloon and ultimately led to the companies’ defaulting.”
Still, the links are sometimes more tenuous than they might appear at first glance. In some cases, the sponsors were in fact rescuers of companies that got into trouble on their own, while in some others, the private equity investments were in industries that already were facing their own secular problems.
Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Cos. Inc., published its report, “Til Debt Do Us Part: A Study Of Serial Defaulters,” this month, identifying 99 companies, in a database dating from 1981, that have defaulted on their loan obligations more than once in their lifetimes. With 1,831 companies in the database that recorded a default, those 99 represented about 5.4 percent of the total defaulters. S&P went on to note that 90 of the 99 defaulted twice and nine defaulted three times.
Of those 99, 55 of the issuers, or 57 percent, were linked with alternative investors—among them buyout funds, hedge funds, special situations funds and REITs. “This is perhaps not surprising because traditional funding sources usually dry up as distress increases, making room for alternative investors,” S&P noted.
Of the 55 companies linked with alternative investors, 47 had two defaults and seven had three.
To review S&P’s findings, Buyouts went through its own screen of the 99 multiple defaulters, finding 33 that had ties to private equity firms, as opposed to hedge funds, REITs or other types of investor. Within our universe, 27 of the 33 had two defaults and six had three.
Viewed another way, 76 buyout firms, venture capital firms and institutional co-investors had ties to those 33 portfolio companies, either in consortium investments or sponsor-to-sponsor handoffs.
To be sure, it is easy enough to find examples that confirm S&P’s thesis. The gambling and entertainment company Harrah’s Entertainment Inc.—taken private in January 2008 by
Likewise, Clear Channel Communications Inc.—taken private in July 2008 by a consortium that included
Other cases paint a different picture of companies and their problems. American Restaurant Group Inc., a chain of steakhouses based in Los Altos, Calif., had defaulted twice before, in 1997 and 2004, before
Or consider the case of Ziff Davis Media Inc., a publisher covering high technology that defaulted in July 2002 in the wake of the dot-com meltdown and again in March 2008 as the economy once again slumped into recession. A management- led investor group, including Vivek Shah and