According to an article in the business section of The Daily Telegraph, alongside fears of technology bubbles and housing bubbles, another sort of bubble is inflating. The amount of debt that US private equity firms are loading on to the companies they buy has risen to its highest level since the latest slump began seven years ago.
A year ago American regulators warned Wall Street banks that they would run into trouble if they financed acquisitions that saddle companies with debts more than six times their earnings before interest, taxes, depreciation and amortisation (the writing off of assets over time), which is known as the EBITDA ratio.
Banks were also cautioned to move away from offering loans which stretch repayments over a very lengthy period of time and not to sign deals which lack covenants allowing lenders to step in if the loan becomes risky.
Many banks have ignored these warnings. According to research by S&P Capital IQ, around 40 per cent of the private equity deals in the US this year have breached the recommended debt-to-profits ratio, the highest level since 2007 when 52 per cent of private equity deals exceeded the EBITDA ratio.
Even after the recent crash, finance capital is still making merry and dancing ecstatically to the next phase of the economic crisis.■