Friday, November 2, 2012

Junk Bond Sales to Pay Private Equity Investors

The Junk Is Back in Junk Bonds

New York Times Editorial
Published: November 1, 2012

Junk bonds — debt issued by companies with low credit ratings — are growing junkier by the day, with ever weaker companies issuing bonds for ever riskier purposes. The bonds’ falling quality and rising risk, described recently in The Times by Nathaniel Popper, show gaps in investor protection. They also revive concerns about how private equity owners of companies that issue the bonds are using that money.

Demand for junk bonds has soared this year, as both institutional and individual investors have sought higher yields in a near-zero interest rate world. As demand has risen, ever shakier companies have been able to find buyers for their debt, leading to a decline in recent weeks in the average credit rating of junk-bond-issuing companies.

At the same time, the reason for issuing junk debt has changed for the worse. For most of this year, companies used the proceeds from junk bonds to refinance high-rate debt, a move that shores up a company’s financial health.

But, in recent weeks, more of the proceeds have gone to pay dividends to private equity owners, a move that can weaken a company by increasing its debt load without strengthening its underlying business. As critics of private equity rightly point out, the result is too often job losses and even bankruptcy, while private equity owners are vastly enriched in the process.

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