Corporate Deal-Making: Too Much Leverage
Posted on July 27th, 2007 by Kemp
There has been a boom in deal-making over the last couple of years. Wanna guess how the deals were funded? That’s right, DEBT.
Here is a quote from Adrian Ash in his latest commentary:
“Spending on mergers and acquisitions in the US stock market rose to a record total of $1.1 trillion during the first five months of this year. Globally, a full 78% of all corporate deal-making was paid for in debt, most typically corporate debt sold onto the bond market.”
For so much credit being pumped into the markets, this rally has been awfully weak. These figures do not include the huge amount of share buybacks funded by debt.
Filed under: Economics
I wrote a post called, “Speculative Bubble: IPO mania and LBO mania leave companies, hedge funds, other speculators skating on thin ice.” Here is a good quote from that post:
For example: in 2004, the ratio of cash flow to debt payments was 3.5 to one. Last year, the average fell to two to one. Recently, the average is down to 1.5 to one. I wonder how these companies can even pay their taxes. It gets worse. According to the Reuters article (linked above), some of these private equity deals have breached the one to one barrier—leaving companies to eat into reserves to pay interest on their debts.
[…] **Massive, leveraged buy-out deals being reversed, as lenders wise up to the fact that these deals are Losers with a capital “L.” […]