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Quantitative Easing Has Made Private Equity Debt Levels Explode
Pinnacle Digest writes: In James West’s latest article he discusses the lackluster impact QE3 has had and why it has failed in gaining any positive investor sentiment for the market.
West explains that investors are now privy to exactly how quantitative easing programs work. They have learnt to front-run quantitative easing decisions and sell once it is announced. Investors have learnt that the long-term impact of QE programs are minimal and with each new easing program, they become less effective.
Elaborating on the problems in America, West explains “I’ve said it before and I’m evidently going to be repeating myself, but the illusion of “recovery” that the political class desperately clings to and that is dutifully parroted by the financial media, is nothing more than the effect of massive financial fabrication and insertion into the banking system piling up as earnings and higher commodity prices. This is the very real reason why employment continues to weaken, despite what the selectively rigged reports of the Department of Labor Statistics purports to tell us.”
West explains that QE programs bring about a cost-free capital environment, which is best exemplified in the phenomenon referred to as “dividend recapitalization”. He states that “In this latest scheme foisted on the general population by unscrupulous bankers (like Mitt Romney – Bain Capital is at the forefront of dividend recaps, as they’re called), companies with strong balance sheets and earnings are encumbered with debt by their controlling private equity owners, and the debt is paid out as dividends to the private equity shareholders.
The sole reason that this is possible is that the cost of debt for prime bank customers is next to nothing, and so loading them up with debt is the technique favored by private equity to squeeze extra earnings from their investments.
Unfortunately, the result is a much higher bankruptcy rate among corporations owned by private equity groups who subject them to such dividend recaps. In fact, the rate of bankruptcy is roughly double. (Thirteen percent as opposed to 6 percent for non-encumbered businesses.)”
One credit crisis has now paved the way for another. According to Standard & Poor’s, $54 billion of debt has been issued to fund private-equity dividends. That tops the previous record of $40.5 billion in 2010.
West explains that when private equity groups load up their portfolio companies with debt, they increase the likelihood of these companies going bankrupt - thus increasing the possibility of skyrocketing unemployment and a worse mess than we saw in 2008.
West also highlights the fact that the rate of these financings are on the rise, just like sub-prime mortgages were before that bubble collapsed.
According to Ben Feder, special counsel at Kelly Drye;
“Even as the financial crisis of 2008-09 began to ebb, the so-called “wall of debt” loomed large. Hundreds of billions of dollars of leveraged and high yield debt issued during the irrational exuberance era was coming due by 2014, threatening to drive up default rates and posing an ongoing threat to the health of the international financial markets.
Click here to read James West’s full report on this disturbing trend.