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Leveraged buyouts: Why LBO risk is over hyped

The rumour mill is creating great opportunities for debt vs equity trades

McAdie: "LBO and event risk is
real but it's been hyped up
a lot"

The number of companies that could soon be subject to a leveraged buyout may have been overestimated, prompting a mistaken re-pricing of risk in many names since Easter. "LBO, and event risk, is real, but it's been hyped up a lot and needs to be looked at name by name," says Robert McAdie, global head of credit strategy at Barclays Capital. "There is a lot of over-estimated risk being priced into some sectors." In April, Barclays Capital's credit strategists identified 15 US and 15 European names as the most vulnerable to an LBO. Boots, Sainsbury's and Marks & Spencer were notable European retail names on Barclays Capital's original list. Seven of the US names were in the auto parts sector and three in healthcare. Utilities were dominant in Europe, with seven names on the list. But by May, three of the larger European utility names – Centrica, Severn Trent, and NIE – had been taken off.

"European utilities have restructured their balance sheets, so there's not much scope for asset sales to support an LBO-buyer's turnaround needs," says Barclays Capital utilities analyst Sharon Vieten.

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