The amount of debt in US leveraged buyouts has increased to levels reminiscent of the boom years before the financial crisis, as private equity groups tap buoyant credit markets.
Private equity investors aim to boost returns by using more bank debt or bonds than their own cash to fund takeovers. By the end of September, the debt component in US deals, which is serviced by the profits of the purchased companies, equalled 5.3 times the companies’ earnings before interest, taxes, depreciation and amortisation, according to S&P Capital IQ.
This is the highest ratio since 2007, when the average debt portion reached a peak of 6 times ebitda, and surpasses the 2006 level of 5.1 times. Six years ago, such ratios were symptomatic of a credit bubble, leaving groups including educational publisher Cengage , UK music group EMI and US power utility Energy Future Holdings struggling with high debts after the crash.