Credit ratings agency Moody’s released a report on Thursday that finds private equity-backed companies defaulted at twice the rate—nearly 17 percent—of non-sponsor-backed speculative-grade borrowers between January 2022 to August 2023.
The finding itself isn’t surprising given the debt-heavy nature of leveraged buyouts, which Moody’s acknowledges: “Private equity-backed companies tend to have more debt and lower credit ratings than their peers, contributing to the higher default rate.”
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The more interesting takeaway is the agency’s firm-level breakdowns.
More than half of the covered companies owned by Platinum Equity and Clearlake Capital are at heightened risk of default, defined as a credit rating of B3 Negative or below. On average, the two firms also have the highest leverage ratios among the dozen largest sponsors covered in the report (defined as firms with at least 15 rated companies over the period).
Ares Management was not far behind on the B3N list, with 47 percent of its portfolio companies considered distressed.
The incidence of poor ratings at current portfolio companies does seem to correlate with actual outcomes. Over the period, more than a third of Platinum-owned companies covered by Moody’s underwent an out-of-court restructuring or defaulted. For Clearlake, that figure was 17 percent.
Distressed debt exchanges accounted for most of the defaults. “Private equity sponsors have favored these exchanges in recent years as a way to preserve their equity and exploit loose governing provisions to claw financing from some lenders at the expense of others,” said Moody’s.
Apollo Global Management also appeared close to the top of the tables, with nearly a quarter of its Moody’s-rated companies defaulting since 2022.
A spokesperson for the firm took issue with the findings, saying: “Leverage in Apollo’s private equity portfolio is among the lowest in the industry,” and challenged Moody’s characterization of term loan extensions and opportunistic debt exchanges as defaults. Apollo also pushed back on the B3N list and says its portfolio companies are performing well and not in distress.
Broadly, Moody’s data confirm the prevalence of this year’s headline trends, including usage of payment-in-kind toggles, continuation vehicles, and liability management exercises.
One notable takeaway is the rejection of a common anti-private equity narrative: dividend recaps do not actually cause higher rates of default. While often cited in re-tellings of deals gone wrong, Moody’s finds that dividend recaps in its coverage universe are typically done on the highest quality assets in the portfolio.
Moody’s does note that its analysis is less comprehensive than in years past. Many borrowers have refinanced publicly-rated debt with private deals and are no longer rated.
Certain firms have led the trend. Vista Equity Partners, Carlyle Group, and Thoma Bravo—historically among the most-frequently rated sponsors—have now “nearly disappeared,” says Moody’s.