whitepaper icon

The Next Big Buyout

2 min read

Executive Summary

  • In the past year or so, LBO minefields started to appear in the “safe and sound” investment-grade credit landscape filled with A and AA-rated names.
  • About 27% of the A-rated corporate index may be buyout targets.
  • The LBO of Sallie Mae brings takeover risk to the “safe haven” financial sector.
  • All of the remaining independent finance names may be LBO targets.
  • By sharing our screening process with our investors, we hope to communicate sensible credit management by separating fact from fiction and prudence from panic.

Introduction

Tales of leveraged buyout (LBO) deals, often fascinating and occasionally outrageous, never used to mean much to cash investors. LBO candidates used to be smaller, junk-rated bond issuers that did not make the approved lists of most risk-averse investors. In the past year or so, minefields started to appear in the “safe and sound” investment-grade credit landscape with not only BBB, but also A and AA-rated names being regarded as potential LBO targets. With a recent deal involving student loan lender Sallie Mae, the risk also spilled over to the traditional “safe haven” financial sectors.
LBOs are hazardous to bond investors since private equity firms often take over targets using one-third cash and two-thirds debt. The much higher debt leverage and higher interest paid on the new debt almost always pushes the target company’s credit ratings into below investment-grade, or “junk” status. The value of the outstanding bonds often drops precipitously at the announcement of a leveraged transaction.
In this study, we will discuss some of the common screening criteria in finding which A and AA-rated corporate issuers may fall prey to private equity firms. Based on these criteria, we also produced two lists, one financial and one non-financial, of likely candidates from which investors can conduct research and apply their own judgment.
DOWNLOAD FULL REPORT

Our research is for personal, non-commercial use only. You may not copy, distribute or modify content contained on this Website without prior written authorization from Capital Advisors Group. By viewing this Website and/or downloading its content, you agree to the Terms of Use.

Please click here for disclosure information: Our research is for personal, non-commercial use only. You may not copy, distribute or modify content contained on this Website without prior written authorization from Capital Advisors Group. By viewing this Website and/or downloading its content, you agree to the Terms of Use & Privacy Policy.

Lance Pan joined Capital Advisors Group in 2003. As Director of Investment Research and Strategy, Lance assesses the risk and relative value of asset classes and credits, creates advanced credit approval and surveillance procedures, issues credit opinions, and provides investment strategy recommendations. Lance oversees Capital Advisors Group’s Credit Committee.

Similar Posts

dark mysterious landscape with many doors

Asset-Backed Securities in Cash Portfolios: Worth the Effort or Unnecessary Complexity?

Credit & Risk

18 min read18 min readFinancial markets have closely monitored consumers’ financial health following the COVID-19 pandemic to gauge when the exceptional economic tailwind provided by high levels of household savings would fade. Accounting for roughly two-thirds of GDP, consumer spending was juiced by pandemic era stimulus programs which ballooned household savings. These savings were later depleted as…

SMA website image

Credit Insight: The Backbone of Counterparty Risk Management

Credit & Risk

10 min read10 min readAbstract Changing credit landscapes, more complex financial products, multiple touchpoints with large financial intermediaries, and high profile bank failures are just some of the challenges treasury management professionals and cash managers face in counterparty risk management. An effective counterparty strategy should provide clarity on the counterparties’ credit strength individually and collectively, and have…

Credit Implications of The Digital Markets Act

Credit Implications of The Digital Markets Act

Credit & Risk

9 min read9 min read Introduction On March 7th, 2024, the European Commission (EC) began enforcing the Digital Markets Act (DMA), one of the most sweeping antitrust policies for Big Tech to date. Yet despite the broad scope covered under the legislation, the market reaction was relatively muted. This suggests a belief that the companies’ operational changes…

Apple Q2 Earnings: Share Buybacks, China, and AI

Apple Q2 Earnings: Share Buybacks, China, and AI

Credit & Risk

2 min read2 min readFor the quarter ending March 30th 2024, Apple reported net income of $23.6B, down 2.2% year-over-year, on revenues of $90.8B which were 4.3% lower over the same period. The change in revenues reflected a 14.2% increase in services revenue and a 9.5% decrease in product revenues. Of particular note, iPhone sales which accounted…

The Empire Strikes Back: Return of Oil and Gas Dominance for U.S. Integrated Energy

The Empire Strikes Back: Return of Oil and Gas Dominance for U.S. Integrated Energy

Credit & Risk

5 min read5 min readIntroduction Earlier this year, European oil majors BP and Shell announced that they would roll back their energy transition plans and keep oil and gas as relatively large parts of their portfolio. In October 2023, their American counterparts Exxon Mobil and Chevron doubled down on a collective $115 billion bet on fossil fuels….