Leveraged buyouts of companies by private equity firms are sweeping Europe, leaving corporate bond investors exposed to losses.
Just this week, UK retailer Marks & Spencer and Italy’s Telecom Italia fell prey to US private equity funds, causing prices of their bonds to drop sharply.
Private equity firms typically load up companies with debt to finance such buyouts. The extra pile of debt, in turn, risks leading to a downgrade of the company’s existing bonds, sending their price lower and causing losses in investors’ portfolios.
There is a lot of money “sloshing around” in private equity funds, said Annabel Rudebeck, head of non-US credit at Western Asset Management. Highlighting the risks this could pose to credit investments, she said: “we should be alert to that.”
Substantial stimulus measures rolled out by central banks in the wake of the pandemic have meant private equity firms can finance leveraged buyout projects at low costs.
M&S’s bonds tumbled after reports emerged during the weekend that US private equity firm Apollo Global Management was interested in the grocer. Telecom Italia’s bonds also fell sharply after another US private equity company KKR launched a €10.8bn ($12bn) buyout bid for Italy’s largest phone company Monday.
European telecoms is one area that’s “pretty rife with noise” surrounding M&A interest at the moment, Rudebeck said.
The yield on M&S’s 6% June 2025 bond, which moves inversely to its price, shot nearly 45 basis points higher from last Friday before the M&A reports emerged. On 25 November it reached 3.243%, the highest level since December 2020, according to Tradeweb.
The yield on Telecom Italia’s 1.625% January 2029 bond rose as high as 3.093% Thursday, up almost 72 basis points from last Friday and the highest level since May 2020, Tradeweb data showed.
Latest reports suggest KKR is weighing raising its takeover bid to win over French media titan Vivendi, a top investor.
These latest takeover stories are part of a wider trend for private equity buyouts this year, fuelled by cheap financing.
European high-yield debt issuance hit €116.4bn in the year to October, up from €75.4bn at this time last year and driven by “notably strong” sales aimed at financing buyout deals, according to Covenant Review’s sister company, CapitalStructure.
Write to Lorena Ruibal at [email protected]
This article was published by Dow Jones Newswires