LBO Chief Warns of Coming Debt Crisis

You seldom hear language like this from anyone in the deal community, particularly a borrower. But Steve Rattner, head of Quadrangle Partners, sees himself as not just your average LBO maven, but also a thoughtful Democrat (he was expected to get a post in a Kerry administration). But also notice that his comments in a Reuters article weren’t picked up by the usual suspects in the business media.

Rattner warns of overly-lax lending to private equity deals that he characterizes as part of a credit bubble (see our posts here, here , here and here on the same topic). One has to wonder, however, when someone decries a situation that he is nevertheless exploiting.

From Reuters:

Leading players in private equity hailed the accommodating debt markets that continue to spur leveraged buy outs to new highs, but warned the credit that helped finance the LBO boom would not last forever.

Global debt issuance rose 3 percent to $1.73 trillion in the first quarter, led by a surge in corporate bond sales as companies chased financing for mergers and acquisitions, according to data firm Dealogic.

Global issuance of corporate bonds was up 22 percent to a record $700.54 billion in the first quarter, including $626.3 billion of high-grade debt and $74.3 billion of junk-rated debt.

“This is better than it gets for the private equity industry,” said Steven Rattner, managing principal of Quadrangle Group LLC at the Reuters Hedge Funds and Private Equity Summit in New York.

However, Rattner said that if the overall economic picture changes for the worse, a number of highly leveraged deals could be brought down.

Rattner said the world economy will not always grow at 3 percent, and that when it slows, some leveraged buy outs are going to end up in trouble.

“I still think it is an accident waiting to happen,” Rattner said. “Of all the bubbles, the bubble in the credit market today is one of the greatest — it is beyond any rational measure.

“Frankly, we are all feasting off the imprudence of our lenders. They are subsidizing our transactions and are allowing us to make deals that wouldn’t have made any sense.”

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