Private equity’s decade-long debt binge is coming back to haunt it when it comes to obtaining the U.S. government’s coronavirus aid.
The loophole that allowed name-brand restaurant chains like Shake Shack to get coronavirus-relief money stays, for now.
Private equity has used debt as jet fuel for acquisitions because ultra-low interest rates have made financing cheap and easy to obtain. It’s a lucrative strategy because the more firms rely on borrowed money, the less cash they have to put up and the higher the returns. As leverage on deals increased and safeguards protecting lenders eroded, regulators began sounding alarms. But the practice continued with many on Wall Street saying it was just pushed to less regulated shadow banks.
Private-equity firms have completed more than 15,000 buyouts since 2010, including almost 2,000 in 2018, data compiled by Bloomberg shows. Private-equity firms that focus on smaller middle-market companies inked a record $500 billion of deals in 2019, according to data provider PitchBook. As of last year, leveraged buyouts had left purchased companies with $119 billion of borrowed money, including debt those businesses may have held prior to the acquisitions, according to Covenant Review data.
In the Main Street program, loans top out at $150 million and will be distributed by banks and then purchased by the Fed. For a business taking out a new loan, its existing leverage can’t exceed four times its 2019 earnings before interest, taxes, depreciation and amortization . If a company wants to add to an existing bank loan, its debt load can’t be more than six times Ebitda.
Congress already kept most private-equity owned companies out of the $350-billion Paycheck Protection Program, a Small Business Administration effort that launched earlier this month. Though PPP
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