What value an investment-grade rating?
In June, investors began to reject low returns on subordinated structures such as PIK toggle notes from riskier issuers. It will be tougher for sponsors to pile more debt on their already leveraged acquisitions. But public company managers aren’t free from the private equity threat.
This May, when the board of Australian airline Qantas realized that the leveraged buyout bid for the company from Airline Partners Australia that it had recommended had failed to garner enough shareholder support to take the company private, recriminations were immediate. The chairwoman and one board director announced their early retirements and the regulatory authorities in Australia announced new measures to monitor the incentives for corporate insiders to support take-private bids.
Less headline-grabbing: the company announced that it would be reviewing its capital management policies. Moody’s got the hint, though. It put the airline’s Baa-1 long-term rating under review for possible downgrade. Shareholders caught on quickly too, bidding the stock up, even as the Macquarie and UBS backed vehicle’s offer collapsed, in the expectation that management would now execute the same plans under public ownership that it had been hatching to boost the value of the company in private.
Qantas is just one recent example. Will more and more public companies respond to the threat of private equity takeover by doing just what private equity companies do: reducing equity and increasing debt to lower the overall cost of capital and ramp up the stock value?
Private equity has become a game of simple financial engineering.