produce a future income stream that
could service and repay the debt.
Increasing Asset Prices. Capital has
been pouring into private equity funds
during the past decade. Uninvested
global private equity dry powder ended
2015 at a record $1.3 trillion. Private
equity capital, supported by leveraged
debt, resulted in record investments over
the past several years, with total global
buyout activity growing from $200 billion
in 2011 to almost $300 billion in 2015.
In addition to competing with other
investors, private equity groups also
began to run up against corporations
looking to grow through acquisitions,
leading to an increase in valuations
and multiples. Middle market leveraged
buyout purchase price multiples hit
record highs in 2015 (Figure 4).
Search for Yield. With interest rates
so low, investors also began to look
to riskier assets to find yield. High
yield issuances, as a percentage of
total corporate issuance, grew to
approximately 25 percent in 2010
and remained above 20 percent for
the following four years, significantly
higher than historical periods. Only in
1997 and 1998 did high yield account
for more than 20 percent of total
issuance during the past two decades.
Stage 3: Recent Trends
In 2015, the strength of the global
economy was called into question as
commodity prices collapsed, Chinese
economic growth decreased, and global
trade slowed. For the first time since the
European sovereign debt crisis, credit
spreads began to widen and low-rated
corporate debt and leveraged loans
began declining in value. These and
other factors suggest that the third stage
of the economic cycle is under way.
Contracting Monetary Policy. The
Fed has begun to draw the curtain on a
seven-year period of zero interest rates,
and central bank asset purchases (on a
net basis) recently dipped below zero for
the first time since the financial crisis.
Profit Margins Under Pressure.
Corporate profit, both in terms of
real dollars and as a percentage of
revenue, began to decline in 2015.
Although partially driven by oil and
gas and additional commodity-related sectors, other nonfinancial
profits have also been impacted.
Defaults, Downgrades Rising.
S&P downgrades exceeded upgrades
in 2015 for the first time since 2009.
Overall, S&P made 817 downgrades
compared with just 575 upgrades.
That trend has accelerated so far this
year, with 556 downgrades compared
with 265 upgrades, a ratio of 2.1x.
Busy Times Ahead
While the economy is by no means
simple, it’s good to keep the trends
mentioned in this article in perspective.
During the next five years an average
of $800 billion in corporate debt will
mature each year, and the economic
contraction—whenever it comes—will
surely mean that the restructuring
community will be busy. J
Brian J. Grant, CTP, is a managing director with
Conway MacKenzie Inc. He has both led and
advised companies through a range of turnarounds
and corporate restructurings across a diverse range
of industries. Grant can be reached at bgrant@
conwaymackenzie.com or 770-628-0805.
U.S. MIDDLE MARKET LBO TRENDS Figure 4
2005 2015 2014 2013 2012 2011 2010 2009 2008 2007 2006
8. 5 8. 1 9. 3 8. 3 8. 2 7. 9
8. 4 8. 8 9. 6
Source: S&P LCD Report, Brown Brothers Harriman
Debt to EBITDA 10
U.S. CORPORATE BOND DEBT AND LEVERAGE Figure 3
2015 2014 2013 2012 2011 2010 2009 2008 2007
$6.6 $7.0 $5.9 $6.5 $7.5 $7.8 $8.2
Source: SIFMA, S&P
Corporate Bond Debt
Debt to EBITDA