Private-Equity Firms Predict Accelerated Pace of Buyouts, Credit-Default Swaps Rise

Strategic Insights -

Private-equity firms Blackstone Group LP and KKR & Co. are predicting an accelerated pace of buyouts in the coming months, prompting a rise in credit-default swaps tied to debt of potential buyout targets. Companies such as Computer Sciences Corp. and Lubrizol Corp. have seen significant increases in credit-default swaps, with Computer Sciences' contracts jumping by almost half last week. The firms, led by Blackstone and KKR, have announced $87.6 billion in deals over the past 12 months and are sitting on an estimated $503 billion in unspent money. As a result, investors are revisiting trades last used during the 2007 buyout boom, when record debt levels decimated credit ratings of acquisition targets.

Key Takeaways:

  • Credit-default swaps on Computer Sciences Corp. jumped by almost half last week, with contracts rising to 70 basis points, the highest level in a year.
  • Lubrizol Corp.'s credit-default swaps climbed 22 basis points to 75, reaching the highest since July 14.
  • Private-equity firms Blackstone Group LP and KKR & Co. predict an accelerated pace of buyouts and are sitting on an estimated $503 billion in unspent money.
  • Companies such as Computer Sciences Corp. and Lubrizol Corp. are considered potential buyout targets, with Blackstone and KKR listing them among their target companies.
  • Private-equity firms historically borrowed two-thirds or more of the acquisition prices in their deals, contributing to the previous buyout boom's negative impact on credit ratings.
  • Commercial Real Estate Credit swaps on Computer Sciences have jumped 21 basis points since March 16, while contracts on Lubrizol have climbed 22 basis points during the same period.

Statistics:

  • $87.6 billion: The amount of debt announced by private-equity firms Blackstone Group LP and KKR & Co. over the past 12 months.
  • $503 billion: The estimated amount of unspent money held by private-equity firms led by Blackstone and KKR.
  • 70 basis points: The current level of credit-default swaps on Computer Sciences Corp., the highest in a year.
  • 75: The current level of credit-default swaps on Lubrizol Corp., the highest since July 14.
  • 154 basis points: The extra yield investors demand to own corporate bonds rather than government debt, the narrowest since November 2007.
  • 1.54 percentage point: The difference between corporate bond yields and government debt, the lowest since June 2005.
  • 3.953 percent: The average yield on corporate bonds, the lowest since June 2005.
  • 0.31 percentage point: The decrease in yields on top-ranked securities backed by commercial real estate loans last week.

Sources:

  • Bloomberg
  • CMA DataVision
  • Bank of America Merrill Lynch Global Broad Market Corporate Index
  • Barclays Capital