16th
A Wall Of Debt Coming Due, And Equity Too
The effects of the booming years of the credit bubble 2003-2007 will take a long time to work through the system. Issuance of leveraged loans and commercial real estate mortages increased 2x and 4x respectively during the bubble, and are now coming due.
From the Financial Times Wall of US maturing debt threatens to extend crunch article on November 12:
About $2,700bn of commercial mortgages comes due in the next five years, peaking in 2011, and $1,500bn of leveraged finance debt comes due, peaking in 2014. The pattern of contractual debt maturities is front-end loaded for commercial real estate and back-end loaded for leveraged finance debt.
After the leverage buy-out frenzy of 2003-2007, even the equity market will face a wall of “equity coming due”. Since private equity funds have a life of 10 years, that can usually extended by 1-2 years, management teams will have to divest their companies and wind down their funds. A market with many sellers and fewer buyers (because private equity fund raising tumbled and will not go back to pre-bubble levels for a long time) will put pressure on valuation multiples and bring a lot of investments in negative equity territory, as leveraged loans and mezzanine financing weighing at 5-6x EBITDA at entry are still there, on poor cash generation and lower EBITDA.
