Credit crisis puts vise grip on leveraged companies

Boston Globe ^ | March 21, 2008 | Beth Healy

[AndyJackson]

There are 93 US companies at risk of defaulting on $53 billion in debts, marking a 50 percent jump since last June, when the credit crisis started.

Many of these debt-laden companies were involved in giant leveraged buyouts. Standard & Poor’s ‘‘weakest links’’ report is forecasting that 75 US companies will default on their debts in the next 12 months.

Of the 93 companies at risk, more than half were involved in takeovers by big-name private equity firms, including Boston’s Thomas H. Lee Partners, Bain Capital, and J.W. Childs Associates. The sectors worst hit are media and entertainment, and consumer and retail. Many ... are familiar to consumers, like Uno Restaurant Holdings Corp.,...; Linens ‘n Things Inc.,...; and Univision Communications Inc., the .... ‘‘This is just the beginning,’’ said Diane Vazza, managing director and head of Global Fixed Income Research at Standard and Poor’s in New York. For companies struggling with debt payments, she said, ‘‘There’s no way in a slowing economy, potentially a recessionary economy, to grow out of that.’’…

Many companies, however, are in worse shape because they entered into deals with buyout firms at the frothiest point in the market. They took on large amounts of debt, on the assumption that, if their business grew, they could easily handle the debt service.

Then came the subprime mortgage crisis, the meltdown on Wall Street, and the pullback by lenders. Bain Capital acquired Guitar Center Holdings Inc. last June for $2.1 billion, putting $650 million in debt on the guitar-store chain’s books, according to Dow Jones & Co.’s LBO Wire, an online report. …

Economist Allen Sinai of Decision Economics Inc. said the likely failure of some large companies would be even more disturbing than last week’s collapse of Bear Stearns Cos.

[AndyJackson]

Leveraged investments - the gift that keeps giving.

[AndyJackson]

ping

[RightWhale]

At least it’s a long weekend for business/econ reporters and we won’t hear much about this until Monday.

[misterrob]

Leverage is a way to make money and to think otherwise would be foolish. It has to be managed peoperly though.

This looks like a good time for companies to renogiate some terms.

[ConservativeMind]

Leveraged investment owners: People who deserve the fallout from the risk from which they initially profited.

[Travis McGee]

“Several brokerage houses tumbled; blue-sky investment companies formed during the happy bull market days went to smash, disclosing miserable tales of rascality; over a thousand banks caved in during 1930, as a result of marking down both of real estate and of securities; and in December occurred the largest bank failure in American financial history, the fall of the ill-named Bank of the United States in New York.” ~~"Only Yesterday: An Informal History of the 1920’s" by Fredrick Lewis Allen

[AndyJackson]

Leverage is a way to make money and to think otherwise would be foolish. ... This looks like a good time for companies to renogiate some terms..

Upside they win, downside we lose.

[misterrob]

If you have a house that carries a mortgage then you are an owner of a leveraged investment.

There's dumb leverage and then there's smart leverage. We no longer live in a cash economy and without debt businesses cannot expand, buy capital equipment or hire people. No one says that putting your life savings into junk bonds is smart but without some risk we'd be nowhere in terms of technological advancements.

[bert]

Leverage is just a synonym for borrowed money.

There are very few business with 0 debt.

The problem is “highly levraged’ when easy money disappears. If the tightening occurs with a downturn, there will be a problem.

Keep in mind this is the Boston Globe..... whore spawn of the NY Times. They see the only possible way to win power is to destroy the economy. The electorate must be convinced we are doomed.

The Globe and siblings are doomed and have severe mortal illness.

[AndyJackson]

they entered into deals with buyout firms at the frothiest point in the market. They took on large amounts of debt

A lot of this is not about financing economic growth, but about getting a very very very high multiple on earnings per share (if there was any) by arranging a leveraged buyout. The original shareholders lock in their potential speculative gain and the downside is passed to the holders of the debt instruments and future shareholders.

[AndyJackson]

“Nothing to see here. Just a bunch of Marxists.” Again. It is a very very tiresome song.

[AuntB]

Yep!

[ConservativeMind]

In my post, I meant “highly-leveraged”.

I have no problems with debt, and I agree that, at least when attempting a fast-growth strategy, large amounts of debt help companies grow.

However, such a strategy is truly risky and it is often best to attempt other strategies, such as franchising or partnerships.

That said, many then invest in these companies because they want the upside of the hoped-for upward growth. Investing money is always fraught with risk, and this must be figured in to the investor's gamble. That they lose money is their responsibility, and the FED or Congress shouldn't seek to bail these companies out, as they shouldn't help hedge funds and stupid banks from their stupid decisions.

[bert]

.....such a strategy is truly risky ......

One of the ironies of being in business is that extremely good buisness is just as harrowing, perhaps more harrowing experience for owners and managers as bad business.

Suddenly one day business gets so good it can easily get out of control and the only way to solve the problem is to grow. For many, borrowing is the only solution. Almost no one will face a hoard of customers, both old and new and tell them to go away.

[AndyJackson]

I disagree. Pizza Uno had no excess of customers beating down their doors in cities where they did not exist, and there is no lack of pizza franchises anywhere in the US. This was a business growth strategy undertaken by folks who should have known better, financed with a lot of debt.

In fact, a lot of these cases are not "growth" issues, but merely highly leveraged takeovers of already existing business.