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Commentary

Subprime corporate debt

8 Oct 2013 by Jim Fickett.

The next financial crisis in the US may well be precipitated by corporate defaults. The corporate debt market is large, debt quality continues to degrade, and the Fed is oblivious.

Here is a recent example of corporate debt continuing to go downhill:

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 their 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 … equalled 5.3 times the companies’ earnings before interest, taxes, depreciation and amortisation (ebitda) …

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 [and now?] …

Buyout groups have been able to take on more debt thanks to the growing number of yield-starved investors moving into riskier securities, such as high-yield bonds