Companies owned by private equity firms are landing in default more frequently than other speculative-grade borrowers, according to a report from Moody’s Ratings.
Private equity-backed companies defaulted at a rate of 17% between January 2022 and August of this year, twice the rate of non-private equity-backed companies, Moody’s said in the report released Thursday. Among the 12 largest private equity sponsors — as ranked by Moody’s — the default rate was slightly lower at around 14%.
Private equity-backed companies tend to have more debt and lower credit ratings than their peers, contributing to the higher default rate, Moody’s said. Higher interest rates has also weighed on corporate balance sheets, especially among borrowers with floating-rate debt, which many financial sponsors prefer for flexibility.
Distressed debt exchanges accounted for most of the defaults, according to Moody’s. Private equity sponsors have favored distressed debt exchanges in recent years as a way to preserve their equity and exploit loose governing provisions to claw financing from some lenders at the expense of others.
Private equity firms have also borrowed against their funds’ combined assets, tapped private credit and utilized payment-in-kind features to manage diminishing cash flow, Moody’s said in the report.
Moody’s also highlighted how private equity has turned to tapping more debt to fund dividends, a strategy that allows them to return cash to shareholders as the market for traditional exits like mergers, acquisitions and initial public offerings has shriveled.
That strategy hasn’t led to many defaults, because most of those deals by higher-rated portfolio companies, Moody’s said.
This article was provided by Bloomberg News.