Sponsor-backed companies made up nearly 25% of all companies that defaulted worldwide in 2009, but the pace of defaults fell rapidly in the last few months of the year.
A lower default rate could only mean good things for an LBO community whose highly leveraged portfolio companies were hit hard by the credit crunch and subsequent global downturn.
In the short-term, a lower default rate translates into a lower likelihood of sponsor-backed blow-ups, while longer-term it means lenders could become more comfortable backing new deals.
A record-breaking total of 265 companies defaulted last year, according to Standard & Poor’s. U.S.-based buyout shops backed 63 of those companies (or nearly 24%) at the time of their default.
However, as 2009 came to its close, instances of LBO-backed defaults ratcheted back significantly. After a count of four U.S. sponsor-backed defaults in October, November produced only two. December—despite a total of nine defaults worldwide—became the only month in 2009 not to see a portfolio company fail on its debt obligations, according to an analysis by Buyouts, an affiliate publication of PE Week.
Adding to the good news, the 12-month-trailing U.S. speculative-grade default rate fell to an estimated 10.9% in December, its first monthly decline since October 2007, when the default rate hit a 25-year low of 0.99%, according to S&P.
“We expect the speculative-grade default rate to continue declining to a mean forecast of 6.9% by September 2010, but it could also decline to only 9.9% if economic conditions are worse than expected,” S&P said in a Jan. 4 report.
Year-to-date in 2010, only one company backed by a U.S. sponsor has defaulted. United Site Services Inc., a provider of portable toilet rentals to the construction, government and special events markets, was slapped with an ‘SD’ (selective default) rating after it exchanged more than $400 million of its term loan and mezzanine debt for equity.
S&P viewed the move as a distressed exchange, which is tantamount to a default in the eyes of the ratings agency. The Boston-based company is backed by Angelo Gordon & Co., DLJ Merchant Banking Partners and GSO Capital Partners. —Ari Nathanson