Federal Reserve's Covid Response Fuels Private-Equity Debt Boom
August 12 2020 - 6:29AM
Dow Jones News
By Chris Cumming
The private-equity industry has been a little-noticed
beneficiary of the Federal Reserve's efforts to combat the economic
fallout of the coronavirus pandemic, as central bank support has
spurred a surge in junk-bond issuance by buyout firms.
The second quarter saw one of the highest-ever levels of
junk-bond issuance by private-equity-backed companies, at more than
$31 billion, according to Dealogic, a data tracker. It was the
sixth-highest level for any quarter on record and the highest since
2014, according to Dealogic's data.
The boom in private-equity debt is largely a case of a rising
tide lifting all boats. The Fed's March 23 announcement that it
would launch a bond-buying program spurred huge new debt issuance.
This is true even in areas, like junk bonds, where the central bank
has bought a relatively modest amount of debt.
Most attention has been paid to the Fed's corporate-bond-buying
program, under which it has loaded up on debt from blue-chip
companies like AT&T Inc., Apple Inc. and Verizon Communications
Inc. The Fed has bought about $12 billion of corporate bonds and
exchange-traded funds through the end of July, based on data
released Monday.
The Fed has bought only about $1.1 billion of junk bonds. Unlike
investment-grade debt, the Fed buys junk-rated debt only through
ETFs, which invest broadly in the debt of many companies.
But the Fed's action has had a dramatic effect on the market.
The central bank's intervention unclogged markets that seized up
due to the pandemic, which has helped lower-rated issuers and
private-equity firms, said Gregg Gelzinis, a senior policy analyst
for the Center for American Progress, a liberal think tank.
"The benefit to private equity of the high-yield [purchases] is
far greater than the nominal figure of the bonds purchased," he
said.
Junk-bond yields peaked at 11.38% on March 23, the day the Fed
unveiled its stimulus plans, and immediately declined sharply,
based on the ICE BofA US High Yield Index Effective Yield. The
index was at 5.41% on Monday, roughly the same level as last
December.
Fed Chairman Jerome Powell has described the balance the central
bank is trying to strike in its junk-bond purchases. He said he
doesn't intend to throw the Fed fully behind high-yield debt, but
also wants to prevent lower-rated companies from being unable to
get credit and having to lay off employees.
The bank's actions have attracted some criticism for supporting
risky companies. Americans for Financial Reform, a left-leaning
group that advocates for tougher regulation of Wall Street, on
Thursday released a letter to Mr. Powell saying the bank's ETF
purchases may be supporting insolvent companies owned by
private-equity firms.
The high-yield ETFs the Fed has bought include numerous
private-equity-backed companies, based on the funds' public list of
holdings and ownership data from PitchBook Inc.
For instance, the Fed has bought about $331 million of a
junk-bond ETF managed by iShares that includes the debt of
Refinitiv, a financial-data company backed by Blackstone Group
Inc.; Solera Holdings Inc., an automotive-software company owned by
Vista Equity Partners; PetSmart Inc., a retailer owned by BC
Partners; and HUB International Ltd., an insurance brokerage
largely owned by Hellman & Friedman. All are among the ETF's 70
largest positions, out of more than 1,200 total holdings.
The Fed's high-yield bond buying "provides liquidity to the
market, which is useful to private equity in the sense that it if
you need to refinance debt it's much harder to do in an illiquid
market," said Christina Padgett, head of leveraged-finance research
for ratings firm Moody's.
"The leveraged-finance market has a tendency to be very risk-off
in an unstable environment," she said. The Fed's intervention
"creates an environment in which borrowers can access the
market."
Write to Chris Cumming at chris.cumming@wsj.com
(END) Dow Jones Newswires
August 12, 2020 06:14 ET (10:14 GMT)
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