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By Marine Cole
Private equity activity continues to gain momentum and Carlyle Group is leading the pack.
The private equity firm announced this week its intention to acquire nutritional supplement manufacturer NBTY for $3.9 billion. Deals of this size have been rare this year.
However, the fact that BofA Merrill Lynch, Barclays Capital and Credit Suisse are providing external debt financing for the deal shows that credit markets are easing a bit and banks are more willing to lend to fund private equity activity.
The transaction is the fifth announced by Carlyle in the past month alone. It also invested $175 million in Thailand's largest agribusiness conglomerate Charoen Pokphand Group at the beginning of July, and it recently announced that one of its portfolio companies, consulting firm Booz Allen Hamilton, is preparing for an initial public offering.
Carlyle currently ranks as the largest private equity acquirer worldwide in 2010 with $6.9 billion in deals, followed by Texas Pacific Group with $6 billion, according to data provided by Thomson Reuters. There have been 485 private equity backed acquisitions of US targets valued at $46.8 billion so far in 2010, up three times from the same period in 2009.
Strong issuance in the high-yield corporate debt market has also helped fuel private equity activity.
In Europe, for example, the total value of euro-denominated high-yield bonds is now at the second highest year-to-date level after 2007's record activity, according to Thomson Reuters. There have been 39 euro-denominated offerings in 2010 with a total value of $23.3 billion, just shy of the record $24 billion in year-to-date 2007. For example, in the spring, DynCorp International issued $455 million to fund its $1.5 billion acquisition by Cerberus Capital Management.
Such investors' eagerness to snap high-yield bonds is actually pushing down the default rate. Analysts say that investors' high demand for bonds is allowing companies to refinance their debt even if these companies don't have sound balance sheets and it is often just delaying the inevitable that they will default on their debt, but for now pushing default rate down.
This week, Moody's Investors Service said the European speculative default rate declined to 5.8 percent as of the end of June and the firm expects it will drop further to 1.4 percent by the end of the year.
But Moody's also said that the default rate could rise again as more weakly positioned credits struggle to refinance. In particular, corporate credit quality and the pipeline of new issuance are threatened by European government austerity plans, which may make access to capital markets more volatile at times.
US businesses with subsidiaries in Europe may be impacted too. Fitch Ratings issued a report this week warning US companies of the collateral damage resulting from the European sovereign debt crisis as heightened credit concerns in the European banking system and renewed commitment to budgetary austerity by European governments further dampen regional growth prospects.
In the equity market, Mizuho Financial Group issued a $8.2 billion follow-on offering to comply with the Basel Committee on Banking Supervision's stricter global capital rules, which will take effect by the end of 2012. The transaction ranks as the second largest global follow-on offering in 2010 behind the $11 billion offering from Sumitomo Mitsui Financial Group in January.
Japan currently represents 15 percent of the global secondary market in equity, the highest percentage since the same period in 2006 when Japan accounted for 21 percent of follow-on issuance.
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