In search of higher yields, private equity firms are loaning money, sometimes hundreds of millions of dollars, to ambitious businesses that are not turning a profit but have some prospect of doing so in the future.
Companies turn to these new forms of bonded loans, known as “asset-backed securitizations” (ABS) to raise money without issuing additional stock and diluting current shareholders’ ownership.
About $2 billion ABS bonds have been sold since November, the Wall Street Journal reported.
If a company borrows but then struggles, it can slash spending to still keep up payments on the bond, insiders explain.
The bonds are so unusual that standard ratings agencies, such as Moody’s Investors Services and Standard & Poor’s Global Ratings, rarely list them.
Instead, the bonds are listed by Kroll Bond Ratings Agency, which is trying to grow its business and compete with Moody’s and S&P, the WSJ noted.
“It’s a new form of securitization but we are able to create a probability-of-default opinion,” Kroll said in a statement quoted by the WSJ.
Recent ABS deals include Golub Capital’s $25-million bond purchased from software-delivery firm Cloudbees and Owl Rock Capital Partners $300-million loan to back equity firm Hellman & Friedman’s buyout of Checkmarx, an Israeli digital security company.
So far, ABS deals all have been handled by investment bank MUFG Securities America, a subsidiary of Japan’s Mitsubishi UFJ Financial Group.
“These are healthy companies being wholly inappropriately financed,” Daniel Zwirn, founder of Arena Investors, commented to the WSJ, warning that investors’ continuing hearty appetite for tech firms and rising competition among lenders is making it too easy for smaller companies to sink over their heads in debt.
However, the loans are typically structured more conservatively than conventional bond sales, ABS advocates told the WSJ, and investors are comforted by the involvement of private equity firms.
