Leveraged buyout risk keeps bondholders alert

by Lorena Rubel | UPDATED December 13, 2021 04:34 PM EST

The number and value of c by private-equity firms has reached record highs on both sides of the Atlantic

The recent surge in acquisitions of companies by private-equity firms is a major concern for managers of corporate-bond funds, who have to choose carefully when choosing which bonds to buy.

Private-equity firms typically load companies with debt to finance such purchases, known as leveraged buyouts, or LBOs. The additional credit risk leads to a credit-rating downgrade of the company’s existing bonds, reducing their value and inflicting losses on investors’ portfolios.

“Part of our job as corporate bond managers is to try to identify which companies are at risk of leveraged buyouts,” said Lucy Speck, head of European credit and deputy head of fixed income at Insight Investments.

Colin Finlayson, who co-manages £437 million, equivalent to $579.9 million, of the Aegon Strategic Global Bond Fund, said he “would not think twice about cutting back in a situation where some of the M&A activity” There’s a risk.”

Recent massive asset-buying programs by central banks seeking to boost economies hit by the cheap money boom that have been hit during the pandemic, the number and value of leveraged buyouts by private-equity firms Record highs have been reached on both sides. the Atlantic.

According to Pitchbook, European private-equity firms have made 4,130 leveraged buyout deals worth €570.9 billion, the equivalent of $646.1 billion. Their US counterparts have invested $845 billion through 5,123 deals.

“Lending is very cheap. Private-equity firms have a huge amount of dry powder at the moment as investors look for higher returns,” said Insight’s Ms. Speck.

He added that low interest rates and low returns have pushed a large number of investors, including pension funds, into alternative investments such as private equity.

According to data from Prekin, UK-based private investors are sitting on $312.9 billion in cash, while their US counterparts still have $1.84 trillion in deployments.

LBO candidates are typically asset- and cash-rich companies whose share prices have declined and are undervalued relative to their peers. Private-equity firms will look to take them private, turn them over, and sell them to other companies or the public.

Some bond investors have cut their exposure to target companies as buyout talks unfold, and the trend means credit fund managers need to be careful about which bonds they buy.

“It’s a little more complicated than running for hills from a particular area or with a particular name,” said Annabel Rudebeck, head of non-U.S. credit at Western Asset Management. “We are very careful on the specific bonds that we choose.”

Supermarkets, telecom firms and UK pub operators are prime examples of companies that are in the firing line, analysts said.

UK retailer Marks & Spencer Group and Italy’s leading telecommunications provider Telecom Italia are among companies that have fallen victim to recent reports of buyout interest from private-equity firms, prompting investors to scramble to ditch their bonds. are killing.

According to Tradeweb, M&S bonds fell to 108.775 on June 2025, compared to 110.595 on November 19. Reports emerged that New York-based private-equity firm Apollo Global Management was considering a buyout bid for the retailer. .

Telecom Italia’s July 2027 bonds have dipped below 100.619 on the euro ahead of KKR’s opening of bids for the Italian conglomerate.

While there is no formal bidding for M&S, Telecom Italia had shortlisted consultants a week ago to approach the KKR acquisition. The total Telecom Italia buyout bid will be €33 billion, which includes €22.5 billion in net debt. If successful, it would represent one of the largest private equity buyouts of a European company in history.

The current increased speculation of leveraged buyouts follows two recent high-profile deals.

Shareholders of WM Morrison Supermarkets plc, the UK’s fourth-largest supermarket group, in October accepted a £7.0bn takeover offer from US private-equity firm Clayton, Dubilier & Rice, the largest private equity buyout ever in Europe .

In the same month, Blackstone Group Inc., Carlyle Group Inc. and Hellman & Friedman LLC, a medical-supply firm Medline Industries Inc. Ltd. for $34 billion, the largest leveraged buyout since the global financial crisis of 2007–2008.

Some fund managers prefer to avoid bonds with buyout risk, others may choose to buy bonds when prices drop.

However, LBOs do not always mean a loss for bondholders. Some can even be profitable, and corporate-bond investors need to be prudent.

“It’s Not Straightforward If a Company Gets Junk [is downgraded to junk status] That’s bad for investors. This could really be an opportunity,” said Ms. Speck of Insight Investments.

Some types of bond contracts, such as “change of control” options, protect the interests of bondholders. This provision allows the bondholder to sell the bond back to the issuer at a premium.

“It’s really important which bond you own because you’ve often got security in the form of a change of control,” said Ms.l Rudebeck of Western Asset Management.

After taking Wm Morrison private, CD&R launched a tender to buy back the supermarket chain’s four sterling bonds at a premium.

The move suggests that some private-equity firms may be willing to liquidate old covenants to existing bondholders or replace the typical mix of debt and equity used to finance the company’s assets and operations.