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The brave, risk-loving private equity firm reigns supreme in a nation of tumultuous businesses.
Strong PE firms are taking advantage of great discounts and hoovering up the high-yield balance as banks conduct fire sales of business bonds. Even better, according to a Bloomberg report from Wednesday, companies that already had investment portfolios contributed significantly to the bargain business debts.
Why Purchase?
Interest rates are currently sitting at 4.75 % to 5 %, with the Fed continuing to fight inflation with ongoing hikes. PE firms are purchasing bills at certification cabinet prices and pocketing the escalating yields that come with them( interest rates and bond prices tend to move in opposite directions ), along with those prior bank runs and lenders looking to de-risk their balance sheets. Additionally, even though no PE company wants to see one of its clients fail, it does want to be the first to receive repayment in the event of debt. By making a point of purchasing their bills actually at lower levels, they are thus relieving some of the burden on investment companies.
According to Brad Rogoff of Barclays banks," buying the balance of a resume company at settlement is an interesting method of potentially creating more equity value at lower levels." " You probably like it more at a lower price if you liked it at one price."
Others may slowly prepare for a rainy time, but the corporate equity sector has trillions of dollars of cold, hard cash that it needs to build, making it nearly impossible for PE funds to buy up cheap debt using an investment arm or even repurposed funds( which they use to provide investors with an opportunity to use the secondary market ).
Elliott Management cut its$ 550 million debt to Citrix just last week. Only a few months have passed since the Paul Singer-led industry purchased$ 1 billion in junk bond funds to support its own purchase of the software industry.
For 60 cents on the dollar next summer, Clayton, Dubilier, andamp Rice purchased$ 464 million in payment-in-kind information supporting their purchase of Cornerstone Building Brand. It acquired a majority interest in Roper Technologies' corporate company in November and acquired$ 475 million in debt.
Lest we forget, there is a reason why business debt is so inexpensive today: Danger vs. Reward. The Fed anticipates at least one more price increase in the near future, despite the upheaval following the failures of Signature Bank and Silicon Valley Bank. These payments will only become less valuable as a result of that and the impending recession that people like Jamie Dimon continue to predict. Elliott paid 79 cents on the dollar for their Citrix balance, but deeper economic upheavals may force it to sell them for 60 cent, making Elliott's's 14 % yield that much sweeter.
