Private Equity Fires Back at Moody's

NYT DealBook, November 5, 2009, 5:45 pm — Updated: 7:51 am -->
Moody’s Investors Service seems to have touched quite a nerve with a new report that was critical of the private equity industry. The Private Equity Council, the main lobbying group for the industry, fired back on Thursday afternoon, noting that the report’s conclusions were open to “significant interpretation.”
The Moody’s report concludes that companies backed by private equity investors defaulted at a higher rate during the 21 months ending in October than similarly financed public companies. It contends that private equity firms invest virtually no capital in the companies they buy, especially those in distress.
The report also warns that many of the companies owned by private equity face significant refinancing risks in the next one to three years as more debt comes due.
The Private Equity Council noted that half of the private equity-backed company defaults examined in the study were not traditional defaults, but rather “opportunistic transactions to deleverage companies.”
If one filters out those transactions, the council said, the percentage of private equity companies in the sample that defaulted over the 21-month period falls to 10.2 percent. When annualizing this figure, it said, the annual default rate falls to 5.97 percent.
Stripping out these “opportunistic transactions” also has an effect on private-equity backed companies that have a speculative or “junk” credit rating, the council said. The adjusted speculative default rate was 8.4 percent, which is 29 percent lower than the overall American speculative-grade default rate for the 12 months ending in August, it said.
The Private Equity Council also took issue with its default rate in the 21 months covered in the report. While it acknowledged that the default rate was about 5 percent, the council said that annualized to a default rate of 2.91 percent, which is below the 3.5 percent annual default rate for speculative grade issuers from 1920-2008 and slightly higher than the estimated 1.6 percent annual private equity-backed company default rate.
The council also asserted that that Moody’s contention that private equity sponsors had not injected capital into their companies was “untrue.” The council cited data from Preqin, an alternative asset data provider, which noted that private equity funds had raised and invested $3.3 billion of equity capital to support their existing portfolio companies.
The council went on to note that Moody’s criticism ignored evidence that debt buybacks, which Moody’s classifies as defaults, could “do more to reduce a company’s leverage ratio than equity.”
– Cyrus Sanati