I have often puzzled over the phrase "all good things must come to an end." Not only do I not understand the phrase- it is far too pessimistic world view for me, though admittedly I have high levels of morphine running through my veins right now- but I don't really believe it. The absence of a black hole in our solar system is a good thing. Is that destined to come to an end? Well, maybe, but if that's so then that must mean the solar system will survive until it arrives. This would mean that "the fact that the sun has not burned out yet is a good thing" will never come to an end. See what I mean? Silly phrase. Still, one does have cause to wonder about inordinately good times. They all seem to result in a reversion to the shitty mean before too long. (Parties:Hangovers is as Good Fortune:Bad Luck).
Certainly the Wall Street Journal would have us think so. Consider this line from Dana Cimilluca, Serena NG and Alistair MacDonald's piece this morning titled "Market Unease Casts Shadow on Deals Boom" (subscription required):
One of the main factors behind the buyout boom is an unprecedented willingness of banks and hedge funds to lend to deal makers, with fewer loan restrictions. Should the M&A market come unhinged, the culprit is likely to be an abrupt end to easy debt financing.
The risk level in today's buyouts was highlighted by the sale late last week of debt to finance the $12 billion LBO of Univision. When a group of private-equity firms completes its purchase of the company this month, it will be saddled with debt that amounts to 12 times cash flow, an extraordinarily high level compared with other deals.
The sale may have shown the first signs that investor appetite for risk is beginning to wane. Univision first offered to pay an interest rate of 9.25% to 9.5% on its new bonds but had to raise the interest rate it was offering to 9.75% to complete the sale.
Even before the transaction, some prominent deal makers were beginning to wonder how stretched the debt markets were becoming. Bill Conway, the co-founder of leveraged-buyout powerhouse Carlyle Group, told his partners in an internal memo recently that the firm's lenders are making "very risky credit decisions" and that Carlyle should start doing fewer risky deals.
Carlyle wasn't the only one making comments even before our little blip in the road last week, but then, the media has been predicting the imminent death of private equity for nearly 4 years now. So who do we believe? Not the media, surely.
The reality is that even expensive debt won't kill the LBO world entirely. People quickly forget that back in the "day" (by which I mean the Milken era) interest rates were oppressive and the risk premium on junk bonds huge. We have been spoiled, certainly, by the easy credit and low rates of the last three years (or perhaps longer) but even if the risk-free rate were to spike to 6.50% with a hefty high-yield risk premium there are still deals that could (and would) be done.
Remember that a "pure" LBO targets downtrodden and under-appreciated firms and looks to make the lion's share of its gains through operational improvements and top line growth through highly expert management acumen. (Cerberus started as a distressed debt shop, as did many big PE firms today). Easy to forget that today when everything under $60 billion seems fair game.
Will credit tightening kill the LBO business? No, it will put it back where it belongs.
Don't forget- and I am comfortable torturing religious metaphors since I'm basically an atheist- life started for the human race after the expulsion from Eden.
(Art credit: "Adam and Eve Driven Out of Eden," Gustave Dore, 1865).