Professional Documents
Culture Documents
November 2008
Diane Vazza Jacinto Torres
Managing Director Associate Director
+1 212 438 2760 +1 212 438 3243
diane_vazza@standardandpoors.com jacinto_torres@standardandpoors.com
Global Credit Comment: Private Equity Swirling In The Eye Of The Storm
(Premium)
This is an update on the piece ”Default, Transition, and Recovery: Default Autopsy Finds Traces Of
Private Equity DNA (Premium)”, published Sept. 10, 2008, on RatingsDirect.
NEW YORK (Standard & Poor's) November 19, 2008—An analysis of corporate casualties in 2008
reveals significant private equity exposure. This is not surprising, because private equity groups seek
above-average returns by investing in higher-risk assets, typically entities at the lower end of the
ratings spectrum with constricted “wiggle” room—especially during periods of financial stress. These
sponsors inherently target troubled entities that could be had at an attractive price, turned around, and
sold for a profit. This model worked remarkably well for years when liquidity was ample and investor
confidence was soaring. However, the fast-changing financial landscape in the U.S. and abroad may
have caught sponsors off guard. The deteriorating economic fundamentals and sustained volatility in
the financial markets combine to exacerbate default risk. The slowing economy continues to strain
earnings and the frozen lending markets pose operational risks and put vital capital projects in
jeopardy. Sponsors now face more demanding investors, less accommodative market conditions, and
the typical exit strategies (e.g., IPOs) to which they once had access, no longer make much economic
sense.
Defaults have risen nearly fourfold in 2008, with deteriorating economic conditions and lingering
uncertainty in the financial sector. Through Nov. 17, 2008, 86 entities defaulted globally, affecting
$285 billion, compared with just 22 in 2007 and 30 in 2006, affecting $8.1 billion and $7.1 billion,
respectively. Of the 86 defaulters this year, 53 were involved in transactions with private equity at one
point or another (see table 1). This exposure can be further linked to endowment and pension funds,
asset-management firms, and high-net-worth individual investors, summing up the various players and
complex structure of the capital markets to the second, third, and fourth degrees.
The practices adopted by sponsors may or may not have exacerbated the targets’ balance sheets: Too
many factors contribute to companies’ resilience, or lack thereof. The stability offered by sponsors’
financial strength may have deferred or even averted some defaults. Private equity benefits from the
typical 10-year time horizons entrusted to them by their investors, providing the target entities financial
flexibility to maneuver through difficult and challenging times. Nonetheless, exposure to deteriorating
assets increases risk. It was difficult to anticipate the severity of the current economic and financial
conditions, and sponsors may be more deeply embroiled with their target entities than planned. We
expect the default rate to escalate sharply, reaching 7.6% in the U.S. in the 12 months (For more
details, see “Financial Tumult Pellets Corporates, Exacerbates Default Outlook Threefold,” published
October 16, 2008, on RatingsDirect, the real-time Web-based source for Standard & Poor's credit
ratings, research, and risk analysis.). While recent aggressive government interventions may alleviate
the turmoil in the interbank lending, bond, and equity markets, weak economic fundamentals and
sustained volatility in financial markets are putting increased pressure on corporations, notably
consumer-oriented entities at the lower end of the rating spectrum that are particularly vulnerable
Global Credit Comment: Private Equity Swirling In The Eye Of The Storm Page 1
during cyclical downturns. We expect private equity exposure to the defaulting companies in the
coming months to remain elevated.
Global Credit Comment: Private Equity Swirling In The Eye Of The Storm Page 2
Table 1: Defaulted Entities In 2008* (Continued)
Defaulted Entity Public Ownership (Largest shareholders) Private Ownership (Current) Private Ownership (Prior) Industry Default Date
Leiner Health NBTY Inc. Adams Street Partners, LLC; Consumer / Service 3/10/2008
Products Inc. AEA Investors LLC; Bain Sector
(USA) Capital, LLC; Booker Group
PLC; Electra Partners LLP;
Electra Private Equity Plc;
Golden Gate Capital; North
Castle Partners, LLC;
Steelpoint Capital Partners,
LP; SunTrust Equity Partners
Vertis Inc. (USA) Vertis Holdings, Inc. Apollo Management, L.P.; BT Leisure Time / Media 4/8/2008
Investment Partners
Linens 'n Things Mellon Capital Management Corporation; Apollo Management, L.P.; Consumer / Service 4/15/2008
Inc. (USA) Kenwood Capital Management LLC, National Realty & Development Sector
Corp.; NRDC Equity Partners;
Silver Point Capital L.P.; Tri-
Artisan Capital Partners, LLC
Kimball Hill Inc. Real Estate 4/25/2008
(USA)
Home Interiors & HM Capital Partners LLC Trinity Hunt Partners Consumer / Service 4/29/2008
Gifts Inc. (USA) Sector
French Lick Orange County Holdings, Inc. Boykin Lodging Co.; CFC, Leisure Time / Media 4/30/2008
Resorts & Casino Inc.; Lauth Resorts & Casino,
LLC (USA) LLC
Global Credit Comment: Private Equity Swirling In The Eye Of The Storm Page 3
Table 1: Defaulted Entities In 2008* (Continued)
Defaulted Entity Public Ownership (Largest shareholders) Private Ownership (Current) Private Ownership (Prior) Industry Default Date
Six Flags Inc. Cascade Investment, LLC; Tracer Capital Generation Partners Chrysalis Ventures, Inc.; Leisure Time / Media 6/16/2008
(USA) Management L.P.; HBK Investments L.P.; Hanseatic Corporation;
Dimensional Fund Advisors LP; Snyder, Lawrence, Tyrrell; Ortale &
Daniel M.; Schar, Dwight C.; Renaissance Smith; Red Zone Capital
Technologies Corp.; Barclays Global Management Co., LLC;
Investors; TCW Asset Management Company; Windcrest Partners
JHT Holdings Inc. D.B. Zwirn & Co., L.P.; Kansas American Industrial Partners; Transportation 6/24/2008
(USA) Venture Capital, Inc.; Special Merit Capital Partners
Situations Group Private Equity;
Spectrum Investment
Management Limited;
Stonehouse Capital Partners
Gainey Corp. Transportation 7/1/2008
(USA)
Ginn-LA Conduit Real estate 7/2/2008
Lender Inc. (USA)
IndyMac Bank, IndyMac Bancorp Inc. SGV Bancorp, Inc. Financial Institutions 7/14/2008
FSB (USA)
Pierre Foods Inc. Madison Dearborn Partners, LLC.; Madison Dearborn Partners, LLC P F Management, Inc Consumer / Service 7/14/2008
(USA) Woodhams, Norbert E.; Naylor, Robert C. Sector
Atrium Cos. Inc. ACIH, Inc.; National City Equity Ardshiel, Inc.; Atrium Corp.; Forest and Building 7/17/2008
(USA) Partners, LLC; PPM America GE Investments; Heritage Products /
Capital Partners, LLC; UBS Partners, Inc.; HM Capital Homebuilders
Capital Americas Partners LLC
Belvedere S.A. Angostura Holdings Ltd. Banque de Vizille Consumer / Service 7/18/2008
(France) Sector
Journal Register Zesiger Capital Group LLC; Private Warburg Pincus LLC Leisure Time / Media 7/25/2008
Co. (USA) Management Group, Inc.; Dimensional Fund
Advisors LP; Ancora Advisors, LLC; Heartland
Advisors, Inc.
Portola Packaging On Infinity Coding Solutions Inc.- J.P. Morgan Partners, LLC Health Care / 7/29/2008
Inc. (USA) ATA Ventures; Granite Ventures, Chemicals
LLC; Thomvest Ventures, Inc.
Ainsworth Lumber BlackRock Investment Management LLC; Grant Forest Products, Inc. Forest and Building 7/31/2008
Co. Ltd. (Canada) Dimensional Fund Advisors LP Products /
Homebuilders
WCI Communities Icahn Associates Corp.; Sandell Asset February 06 private placement of Court Square Capital Forest and Building 8/4/2008
Inc. (USA) Management Corp.; Barclays Global Trust Preferred Securities for Partners, previously known as Products /
Investors; Dimensional Fund Advisors LP; gross proceeds of $65 million in Citigroup Venture Capital, Ltd. Homebuilders
S.A.C. Capital Management, LLC; Merrill February 2006. JMP Securities
Lynch & Co. Inc.; Schwartz, Marvin C.; Wilson, acted as the placement agent for
Mary Ann; Whitebox Advisors, LLC; The the transaction.
Vanguard Group, Inc.; Dolphin Associates,
LLC; High Rise Capital Management, L.P.;
Goldman, Sachs & Co.; Arrowstreet Capital,
L.P.; Ore Hill Partners LLC
Global Credit Comment: Private Equity Swirling In The Eye Of The Storm Page 4
Table 1: Defaulted Entities In 2008* (Continued)
Defaulted Entity Public Ownership (Largest shareholders) Private Ownership (Current) Private Ownership (Prior) Industry Default Date
LBREP/L SunCal Real estate 9/10/2008
Master I LLC
(USA)
Motor Coach JLL Partners Consortium G Dina Group Inc. Aerospace / 9/15/2008
Industries Automotive / Capital
International Inc. Goods / Metal
(USA)
Lehman Brothers Lehman Brothers Holdings Inc. Financial Institutions 9/15/2008
Bankhaus AG
(Germany)
Lehman Brothers Barclays Capital Lehman Brothers Holdings Financial Institutions 9/23/2008
Inc. (USA) Inc.
Global Credit Comment: Private Equity Swirling In The Eye Of The Storm Page 5
Table 1: Defaulted Entities In 2008* (Continued)
Defaulted Entity Public Ownership (Largest shareholders) Private Ownership (Current) Private Ownership (Prior) Industry Default Date
Controladora Consumer / Service 10/9/2008
Comercial Sector
Mexicana, S. A.
B. de C. V.
(Mexico)
Glitnir Bank Baugur Group; Milestone ehf.; Burdarás Hf. Financial Institutions 10/9/2008
(Iceland) Straumur-Burðarás Investment
Bank; Government Of Iceland
Viskase Cos. Inc. Northeast Investment Management, Inc.; Grace Brothers Management, Health Care / 10/10/2008
(USA) BlackRock Investment Management LLC LLC; Icahn Associates Corp.; Chemicals
Northeast Investment
Management, Inc.; Northeast
Investors Trust
3D-Gold Transpac Capital Pte Ltd. Consumer / Service 10/15/2008
Jewellery Sector
Holdings Ltd.
(Hong Kong)
Masonite Chuo Mitsui Asset Management Company Kohlberg Kravis Roberts & Co.; Clairvest Group Inc. Forest and Building 10/17/2008
International Inc. Limited; ING Mutual Funds Management Masonite Holding Corporation (TSX:CVG) Products /
(Canada) Company (Japan) Ltd; Barclays Global Homebuilders
Investors Japan Limited; Morgan Stanley
Investment Management (Japan) Limited
Majestic Star Majestic Holdco, LLC Leisure Time / Media 10/15/2008
Casino LLC (The)
(USA)
VeraSun Energy Endres, Donald L.; Invesco PowerShares Bluestem Capital Partners Eos Partners, L.P. Energy and natural 11/3/2008
Corporation Capital Management; Fagen, Ron; Barclays resources
(USA) Global Investors, National Association; Palo
Alto Investors, LLC
Hawaiian Telcom Hawaiian Telcom HoldCo, Inc.; Verizon Communications Inc. Telecommunications 11/3/2008
Communications The Carlyle Group; (NYSE:VZ)
Inc. (USA)
Pilgrim's Pride IIG Management, Inc. (Pending); Consumer / service 11/6/2008
Corp. (USA) Pilgrim’s Pride Corporation sector
(NYSE:PPC)
American Media American Media, Inc. J.P. Morgan Partners, LLC Leisure Time / Media 11/7/2008
Operations Inc.
(USA)
IT Holding SpA GTP Holding Spa; Giribaldi, Luigi; Eurizon Consumer / Service 11/17/2008
(Italy) Capital SGR S.p.A.; JPMorgan Asset Sector
Management (UK) Limited; Leonardo SGR
SpA
Global Credit Comment: Private Equity Swirling In The Eye Of The Storm Page 6
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Global Credit Comment: Private Equity Swirling In The Eye Of The Storm Page 7