LBOs: Wait and see
Far from looking to exploit opportunities in the hung LBO pipeline, some say that patience should be the watchword in this market.
"There is a very big danger associated with chasing things too hard," says Ian Cash, managing director at Alchemy Special Opportunities Fund. "Some people have money burning a hole in their pocket and are chasing marginal opportunities – and those marginal opportunities are marginal for a reason." Another investor agrees. "You can’t push too hard on the market. If it is not yielding up opportunities then you have to back off. But we are now at a tipping point and we will start to see companies entering distress."
Considering the amounts of money that have been and are being raised with this in mind, it will take a great deal of discipline to wait it out until the market runs its course. Default risk over the next 12 to 18 months remains minimal. In a recent JPMorgan conference call, Peter Acciavatti, head of US high-yield credit strategy, pointed out that with the present default rate standing at slightly below 1%, he sees defaults rising to just over 2% by the end of 2008 and to 4% by 2009. The recent crop of highly leveraged LBOs (legacy deals) therefore have a bit of breathing space before they are due to refinance.