Private equity’s rising debt gets Fed’s attention

Amy Scott Jun 5, 2007

Private equity’s rising debt gets Fed’s attention

Amy Scott Jun 5, 2007


KAI RYSSDAL: Benny, Benny, Benny. You know, he probably tries hard to make his speeches listenable. It’s just that his material’s kind of dense sometimes. And contradictory, too.

Fed Chairman Ben Bernanke gave a speech today. He said, as you heard, that housing’s going to be doing a number on the economy longer than anybody thought it would. But then he turned right around and told us he’s still worried about that thing he’s been worried about forever.

BEN BERNANKE: Although core inflation seems likely to moderate gradually over time, the risks to this forecast remain to the upside.

What to make of it, then?

Equity investors on Wall Street would’ve preferred he said nothing at all if he couldn’t say anything nice. Bond traders, they took it as a sign interest rates might well go higher the next time the Fed meets at the end of the month.

Yields on the benchmark 10-year Treasury nudged up against 5 percent today. In these markets, that’s a level analysts look at with special attention. Rising interest rates make money more expensive, of course, but that hasn’t stopped the buying binge that private equity’s been on of late.

Just today, TPG Capital and Silver Lake Partners bought the telecommunications equiptment company Avaya for $8 billion. That’s a deal they’ll have to borrow heavily to finance. In the first three months of this year, what are called leveraged buyouts totaled $188 billion. And Fed officials are starting to worry that all that debt might be a little bit too risky.

Marketplace’s Amy Scott takes it from there.

AMY SCOTT: Bernanke has already said he’s worried about how much debt is being used to finance private equity deals. The Office of the Comptroller of the Currency oversees the U.S. banks that lend the money. Today, the office confirmed that it, too, is paying particular attention to this kind of high-risk lending.

MIKE BACEVICH: I think that there’s a reason to be somewhat nervous.

Mike Bacevich invests in corporate loans for Hartford Investment Management. He says banks are so keen to get in on private equity deals, they’ve gotten a bit lax. Most loans come with conditions that protect the lender. But these days, Bacevich says banks are relaxing those requirements — and sometimes eliminating them altogether.

BACEVICH: The cliché is the worst loans are made in the best of times, and the economy has been reasonably strong now for several years. When there’s good times like we have now, lending standards tend to drop.

If the good times turn bad and borrowers can’t pay, banks could end up holding the bag.

Martin Fridson publishes the research newsletter Leverage World. He says the Comptroller’s office may tell its examiners to look more closely at banks’ portfolios. And if the examiners find too many risky loans, they may warn banks to tighten their standards.

MARTIN FRIDSON: I think under those circumstances, it would be difficult for them to continue creating new loans with the same vigor that they have been. Because they’re already bumping up against Fed concerns about their exposure.

So, will all this scrutiny cool down the leveraged buyout boom? Hartford’s Bacevich says no. He says while investors keep profiting from these deals, the money will keep flowing.

In New York, I’m Amy Scott for Marketplace.

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