Moody’s Investors Service warned that credit investors who’ve plowed billions of dollars into private-equity-sponsored LBO debt will be hit hard when the credit cycle turns and defaults rise, Bloomberg News reported. The giants of the PE world have used their imposing status to loosen terms on the bonds and loans they sell to yield-hungry investors, says Neal Epstein, a senior credit officer at Moody’s. That gives them more room to preserve their investments in a downturn — even if it means losses for creditors. Debt issued by large private-equity firms features few of the lender protections once typical of junk-rated debt, Moody’s said, such as the right to limit cash distributions or additional debt incurrence. That means that when these companies default, debtholders have little recourse to protect their investments. The largest PE firms have enough influence over lenders to maintain control of their assets while in default, Epstein wrote, and — perhaps most significantly — to engineer distressed-debt exchanges, which can preserve their own equity positions while saddling creditors with losses.
