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Bob Carbonell, the chief credit officer at Bernard Sands, a credit-checking firm, commented, "I see factors closely managing risk. I see retailers doing everything possible to pump up liquidity and cut expenses. There is an awful lot riding on back-to-school at many retailers, but if it doesn't materialize, I can see manufacturers and factors rethinking their holiday commitments."
So, while banks have been getting nervous and clamping down on lending to manage risk in their portfolios, these days perhaps not even private equity firms are immune to the overall malaise from the shutdown in the credit markets.
So far retailers such as Goody's, Whitehall Jewelers and Linens-N-Things, all of which were bought by private equity firms within the last two years, have filed for Chapter 11 bankruptcy court protection.
Could more recent buyouts meet the same fate? Perhaps.
In the last several years, money was plentiful, and leveraged buyouts were the rage. Some of those deals might blow up, particularly since the combination of overleveraging and a slowdown in consumer spending aren't exactly the best of bedfellows.
"The problem is that the economy was expanding when these deals were done, and the projections, the growth ratios used, often don't take into account a slowdown in the economy," said Gary Wassner, president of Hilldun Factors. "For the LBO deals, I think many deals won't pan out now that the consumer is pulling back because there's no growth in the sales volume to feed the engine and pay down the high debt incurred from the buyout."
Waxing philosophical on the topic, Triangle's Kestenbaum noted: "One of the phenomena of life in general is that people always assume the future is the extrapolation of the present, and it never is. Therefore, when business is rising, people assume it will continue to rise. When business is declining, people assume it will continue to decline. That's when there can be great opportunities for acquisitions."
Kestenbaum said the early years after an acquisition are often a dangerous time for acquired firms where the deals are highly leveraged.
"That's when those companies have the highest leverage, and therefore the highest risk," the banker said. He explained that the business climate is an important factor because a booming economy allows the cash flow to continue, which enables firms to pay down the debt. As the debt is paid down, the investment in turn becomes less risky to the buyer, Kestenbaum said.
So, while banks have been getting nervous and clamping down on lending to manage risk in their portfolios, these days perhaps not even private equity firms are immune to the overall malaise from the shutdown in the credit markets.
So far retailers such as Goody's, Whitehall Jewelers and Linens-N-Things, all of which were bought by private equity firms within the last two years, have filed for Chapter 11 bankruptcy court protection.
Could more recent buyouts meet the same fate? Perhaps.
In the last several years, money was plentiful, and leveraged buyouts were the rage. Some of those deals might blow up, particularly since the combination of overleveraging and a slowdown in consumer spending aren't exactly the best of bedfellows.
"The problem is that the economy was expanding when these deals were done, and the projections, the growth ratios used, often don't take into account a slowdown in the economy," said Gary Wassner, president of Hilldun Factors. "For the LBO deals, I think many deals won't pan out now that the consumer is pulling back because there's no growth in the sales volume to feed the engine and pay down the high debt incurred from the buyout."
Waxing philosophical on the topic, Triangle's Kestenbaum noted: "One of the phenomena of life in general is that people always assume the future is the extrapolation of the present, and it never is. Therefore, when business is rising, people assume it will continue to rise. When business is declining, people assume it will continue to decline. That's when there can be great opportunities for acquisitions."
Kestenbaum said the early years after an acquisition are often a dangerous time for acquired firms where the deals are highly leveraged.
"That's when those companies have the highest leverage, and therefore the highest risk," the banker said. He explained that the business climate is an important factor because a booming economy allows the cash flow to continue, which enables firms to pay down the debt. As the debt is paid down, the investment in turn becomes less risky to the buyer, Kestenbaum said.
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