Players in the debt market, including corporates, banks and hedge funds, expect leverage ratios to increase next year, while 40 percent of private equity houses expect ratios to decrease, according to research by Deloitte.
Of 200 surveyed organisations, 87 percent of banks, 80 percent of corporates and 83 percent of hedge funds expect leverage ratios to increase or stay the same. By contrast, 40 percent of private equity houses predict that leverage ratios will decrease. Tim Murphy, a debt advisory partner at Deloitte, said the prediction might reflect the view among private equity houses that asset prices will start to level out next year.
James Douglas, a debt advisory partner at Deloitte, said that 90 percent of banks, corporates and hedge funds predict leverage will increase or stay the same, reflecting in part an anticipated increase in corporate leverage on the back of merger and acquisition activity and returns of capital to shareholders.
A huge 91 percent of private equity houses predict that credit spreads will either increase or stay the same, compared with 86 percent of banks, 93 percent of corporates and 83 percent of hedge funds.
Also, 83 percent of private equity houses and hedge funds predict that corporate credit quality will decrease or stay the same, compared with 95 percent of banks and 72 percent of corporates.
While 31 percent of banks and 33 percent of hedge funds expected covenant packages to loosen in 2007, 54 percent of private equity houses predict they will tighten.