Buyout firms behind 62% of defaulting companies in 2008

Eighty-six companies this year have defaulted, affecting $285bn, 35 times the amount affected in 2007. That private equity is behind 62% of these companies is 'not a surprise', according to Standard & Poor's.

Private equity has been involved with 53 of 86 companies that have defaulted on debt payments worldwide as of 17 November, according to a report by US ratings agency Standard & Poor’s.

“This is not a surprise,” S&P head of global fixed income Diane Vazza said in the report. “Private equity groups seek above-average returns by investing in higher-risk assets, typically entities at the lower end of the ratings spectrum with constricted ‘wiggle’ room, especially during periods of financial stress.”

Private equity exposure to defaulting companies will remain elevated, Vazza said.

The 86 defaults this year have affected $285 billion. The default rate represents a massive increase from 2007 when 22 entities defaulted affecting $8.1 billion and in 2006 when 30 entities defaulted affecting $7.1 billion.

The default rate has escalated in recent months with 31 of this year’s defaults occurring since the end of August. S&P expects the default rate, currently at 2.9 percent, to skyrocket to 7.6 percent in the US by October 2009. The ratings agency does not calculate global default rates.

The number of defaulting companies backed by private equity has fallen since September as a percentage, however, when S&P reported that nearly 70 percent of defaulting companies were involved in transactions involving private equity.

Some of the most recent defaults include American Media Operations, a company that defaulted on 7 November and was once backed by JPMorgan Partners. The Carlyle Group portfolio company Hawaiian Telcom Communications defaulted on 3 November as did VeraSun Energy, backed by South Dakota venture firm Bluestem Capital Partners. In October, Kohlberg Kravis Roberts portfolio company Masonite International defaulted.