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Don't panic, diversify

Leveraged buy-outs

Memani: portfolio
diversification a better
defence than drawing
up lists of likely LBO

Bond investors have had the jitters this summer wondering where the next leveraged buy-out would come from. What started off the latest panic was Cox Enterprises' announcement at the start of August that it was to buy the 38% in Cox Communications it didn't already own.

For hedge funds and prop desks armed with the ability to go short using cash bonds or credit derivatives the prospect of being able to play the same game as their equity long/short and merger arbitrage cousins for the first time was very appealing, as Euromoney reported last month.

Traditional bond investors tend to have the opposite reaction. With good reason: if they hold debt in companies that become targets their portfolios could take a hit. For one thing, companies that are subjects of LBOs often get downgraded. What's more, those holding unsecured long-dated debt before an LBO get put in an even worse position after more bridge, mezzanine, secured and unsecured debt are added on to make the transaction work.

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