The media & private equity: A boom financed by dodgy loans?

All sorts of nasty stuff is coming out of the woodwork. Take the otherwise obscure report on shared national credits from US bank regulators, which was published yesterday.

This is an annual exercise designed to give a snapshot of the US market for big corporate loans (specificially: loans of $20m or more given to companies by three or more banks).

Every year, the report’s authors designate a certain number of loans as “criticized” or “classified”. This means that the banks in question are running a risk of not getting their money back.

Not surprisingly, the number of dodgy loans has tripled during the past year. Loans offered by bankers to private equity companies appear to be a particular problem.

According to the FT, the report lays barethe damage done by the lax underwriting standards of the private equity boom”.

“Examiners found an inordinate volume of syndicated loans [used to finance private equity buy-outs] with weak underwriting characteristics.”

‘The most commonly cited types of structurally weak underwriting were liberal repyament terms, repayment dependent on refinancing or recapitalisation, and non-existent or weak loan covenants.”

In other words: it’s not just mortgage brokers who have been cutting corners, setting up homeowners with dodgy loans based on fairytale levels of income. The same thing has been happening in the US private equity industry.

Here in Europe, private equity buy-outs reached a peak in 2006-2007. The roll call of media companies taken private is long: EMAP, Incisive, VNU, Bertelsmann-Springer, The Times Educational Supplement. . .

Did some of those deals happen simply because bankers cut soft deals for their big private equity customers?

If so, could some of the media companies taken private during the boom become victims of the crash? Watch this space. . .

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