Abrdn concern on private equity’s UK buyout spree

Edinburgh asset management giant Abrdn has added its voice to a growing number of UK corporate bond managers with concerns about the current and unprecedented private equity buying spree of British companies.

The spree is causing unease among UK politicians, trade unions and investors over rising debt levels for some of the companies bought out, potentially leading to credit downgrades for investment grade companies.

This can mean investment grade bondholders face risks when leveraged buyouts occur.

Mark Munro, Abrdn Investment Director, wrote: “What we’re looking for here is the potential for private equity to buy out the investment grade businesses, potentially weakening their credit worthiness and possibly resulting in credit downgrades from the rating agencies, even taking the names into high yield territory.

“Morrisons and the AA have been two notable private equity takeovers in the last year.

“Morrisons will likely be downgraded to high yield, though they have recently announced tenders for their existing bonds at par as the bonds contained ‘change of control’ language that is designed to limit downside for bond holders in such an event.

“Speculation has arisen that other supermarkets may be targeted and private equity has of course already been involved in the consortium that has purchased a majority stake in Asda from Walmart.

“Though subsequent debt issued by Asda came in the high yield market.

“Moving onto high yield markets, private equity is a bit different.

“High yield companies are already more highly levered and therefore private equity involvement does not have the same impact.

“They can’t significantly lever up the businesses they wish to buy or certainly, not to the same extent.

“Indeed, private equity sponsors were generally helpful through last year in supporting the balance sheets of high yield companies through Covid.

“There is still balance sheet repair required as a result of Covid and therefore we are not seeing, and do not expect to see, much in the way of private equity stripping out large dividends from high yield businesses at this stage in the cycle.

“When this starts to happen it is normally one of the signs that points towards the fact you are late in the credit cycle.”