Leveraged Buyout Defaults To Soar, Hedge Fund Manager Says

Dec 10 2010 | 10:41am ET

Even if the global economy is on the rebound, the years of reckoning for companies bought by private equity firms prior to the crisis are still to come, according to one hedge fund manager.

Mudrick Capital Management's Jason Mudrick warns that defaults on junk bonds will rise over the next five years, as p.e. portfolio companies acquired through leveraged buyouts before 2008 face the repayment of hundreds of billions of dollars.

"The problem is just too much leverage in a slow economy," Mudrick told Bloomberg News. "Anybody levered more than seven times when it comes time to deal with this, it's going to be tough." And the average debt for companies bought out between 2006 and 2008 is between 7.2 times and 8.2 times Ebitda, Mudrick adds.

The Contrarian Capital Management veteran said there could be as much as $250 billion in defaults by 2015—of the $968 billion in debt maturing over the next five years. Most of the troubles will come in 2013 and 2014, he predicted.

"Don't believe the hype," Mudrick said. "There are still a lot of defaults to come."


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