Deal makers risk collapse

Corporate financiers are preparing for a hot, uncomfortable summer. Leveraged
debt markets – the lifeblood of private equity deals – are becoming stretched
and leading dealmakers have predicted that a correction or even collapse could
be around the corner.

Jon Moulton, the founder of Alchemy Partners, is among the leading figures
who are bracing themselves for a collapse in the leveraged-loan markets, the
chief source of capital for private equity deals.

In a speech at the ICAEW corporate finance faculty’s annual dinner the
influential dealmaker said hedge funds had been among the main drivers of
liquidity in loan markets, but were increasingly fragile as they were becoming
over-extended.

‘The leveraged debt markets are very extended. A collapse, driven by the
fragile market players, such as the hedge funds, is likely,’ Moulton said.

A recent report on European leveraged loans by credit rating agency Standard
& Poor’s lends some support to Moulton’s view. The agency says the market is
tightening and believes that it is a matter of time before debt begins to dry
up.

‘Lenders would be well advised to take full account of recovery prospects
when committing to new leveraged loans,’ the agency warns.

Philip Marsden, the managing director of Vantis corporate finance, says there
is widespread concern surrounding the leveraged-loan market, but adds that a
correction rather than a collapse is more likely.

‘In order to remain competitive banks have been lending on higher EBITDA
multiples,’ Marsden says. ‘The fact that interest rates are now controlled by
independent central banks will help. There is less political involvement in
taking the rate up or down, which has caused crashes in the past.’