Private equity Moody’s Investors Service will on Tuesday warn that it will adopt a tougher stance when rating companies owned by private equity groups that were more “aggressive” in the most recent dealmaking cycle.
This could put companies owned by more aggressive buy-out firms at a relative disadvantage amid the economic downturn as they seek to strike new deals once the credit markets improve.
In a report, Moody’s corporate finance group ranked buy-out groups by their propensity to take out cash dividends from their US investments since 2002. Welsh Carson, Cerberus, Providence Equity Partners, Carlyle, Madison Dearborn and THL topped the list. KKR, Blackstone and Bain Capital were less frequent users of such “dividend recapitalisations”, Moody’s said.
Dividend “recaps” are controversial because they allow private equity owners to extract profits quickly and eliminate risk from a deal, while often leaving portfolio companies in a more precarious financial position.
“The interesting aspect is finding out which firms support their companies and which firms don’t,” said John Rogers, senior vice-president at Moody’s corporate finance. “At the start of the next up cycle, we will be much more cautious in how we rate these firms.”
Moody’s says the purpose of the study – which examined buy-out deals rated for over a year – aims to highlight how “insights into how top sponsors carry out their financial strategies can help shape initial rating decisions”. It also offers investors a chance to be in a “better position to gauge potential for ratings changes”.
Welsh Carson, Providence, THL, Madison Dearborn and Cerberus declined to comment. Carlyle said: “Prudence and a company’s ability to safely service debt dictate the capital structure of our portfolio companies. That’s been our benchmark for recapping in the past and how it will be done in the future.”
