Private equity wonders about regulatory crackdown

Eric Garland Finance Trends Leave a Comment

It turns out that the private equity industry has reached its pre-crisis peak in terms of consolidating industries through M&A activity. Moreover, some people in Washington appear to finally be waking up and realizing that maybe the situation has more in common with 2007 than anyone would care to imagine. And DC might be scared that junk bonds could do to the current economy what derivatives did to the last decade’s:

The private equity industry’s lobbying group met officials from the Office of the Comptroller of the Currency and the Federal Reserve last week to address concerns over a crackdown on junk-rated loans, people familiar with the matter said on Monday.

The meeting comes as the leveraged finance industry awaits the outcome of an annual review of banks’ loan books that took place earlier this summer. Regulators have warned that underwriting standards have deteriorated, though bankers say they expect the review’s findings to be in line with last year’s.

Lending for U.S. leveraged buyouts totaled $46.9 billion in the first half of 2014. It reached $90.5 billion in 2013, the highest level since 2007, according to Thomson Reuters Loan Pricing Corp.

I have been going over the SEC filings of certain firms in the private equity industry and counting up the number of companies that are saddled with loans that are between 7 and 15%. Remember, the interest rate is almost zero, so these are very high interest rates. Many of the companies being funded seem to have a couple characteristics in common. First, they had few other options for financing – potentially seeking other forms of liquidity from bonds or regular term loans, but being refused by all other financial entities. Second, they are high-risk activities for which exorbitant interests rates can only be amortized through explosive, even improbable rates of growth.

So, to recap: high risk loans on high risk activities at the same level as they were just before the worst economic crisis in a century.

And Washington is just now wondering whether they should do a little regulation.

Yeah, guys, maybe now is a good moment.