Private equity-owned companies make up more than half of S&P’s weakest links list

S&P revealed that private equity firms have or had holdings in more than half of the companies on its weakest links list, which counts businesses with credit ratings of B-minus or lower that have been placed on credit watch.  

The list includes companies that were bought out in some of the biggest LBOs in years, such as Freescale Semiconductor, Harrah's Entertainment and Univision, the report said.

Of the 140 companies that have defaulted in the last year private equity firms were involved with at least 79 of them.
 
The S&P report said that exit strategies, such as IPOs, “are less feasible in the current environment, perhaps compelling sponsors to the engagement longer and deeper than they had originally planned”.

According to Mark Spinner, head of private equity at international law firm Eversheds, “The type of businesses that are likely to be subject to a Standard & Poor’s downgrade are likely to be the larger highly leveraged buy-outs which, other than in relation to their financing structure, are more likely to be able to weather an economic downturn due to the quality of their management teams and the robustness of their business models. Typically they occupy market leading positions and as such are well placed to fight off competition from smaller less leveraged rivals.

“In my view it is not the fact that they have or will be downgraded by the credit rating agencies that will cause damage to the private equity industry, but the excessive gearing and thus higher risk incurred as a result of the complex and high leverage in many of these businesses which will reduce and/or eliminate limited partners returns for several years to come.”

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