Newmark warns of leverage-fuelled default disaster

Brooks Newmark, a UK Treasury Committee member and Conservative MP, has warned the industry is heading towards a public relations disaster in the event of the collapse of a big portfolio company bought in the last 12-18 months, which may lead to some serious “knee-jerk” reactions.

UK Conservative Member of Parliament Brooks Newmark has warned the industry must step up its public relations as it is likely a big deal signed in the last 12-18 months will default.

“There will be a significant event which won’t cause a massive macro readjustment, but with enormous amounts of attention directed towards the industry cries will go up of ‘I told you so’ and some knee-jerk decisions will be made,” Newmark said.

In order to lay the ground for the collapse of a big company in the public eye the industry must step up its public relations, he added.

During the UK Treasury Committee hearing on Wednesday Newmark asked the four senior assembled buyout executives about excessive leverage and covenant-lite loans.

Newmark said: “There is a lot of money around in the market and the banks are falling all over themselves to lend to buyout firms, pushing up prices in shares. With the amount of leverage available this could trigger a default, causing problems for one or two private equity firms,”

He said auctions are very competitive because of the amount of leverage and companies are being bought significantly above historic multiples.

“When I hear people justifying the prices because ’a paradigm shift’ has occurred I get very nervous because this was the language used in the dotcom boom and I don’t believe that paradigm shifts exist,” he added.

Following earlier remarks to PEO last week, Newmark said an attempt to tinker with tax on taper relief would be misguided. He said: “The Treasury has found tax revenues have gone up on the back of an attractive tax environment. If they invert that by bringing in a windfall tax on the 40 or so super rich people they want to target, the unintended consequence is there will be an impact on the hundreds and thousands of people in the City [of London].”