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Amend, Extend & Pretend

Preliminary numbers are in for 2009 private equity backed bankruptcies and not surprisingly the numbers are up significantly from 2008.  As reported by peHUB in 2008 there were 46 Chapter 11 filings for PE-backed firms, through November 30, 2009 there were 83.  This was a sharp increase in comparison to the two PE backed firms who went bankrupt in 2008.

My first exposure to private equity was in 2003 when I became an operating executive for a portfolio company of Golden Gate Capital and Cerberus Capital Management.  This was at the beginning of the private equity boom that lasted through 2008.  At that point in time it was inconceivable that a serious private equity backed firm would ever go bust.  It was also inconceivable that a portfolio company’s debt would ever trade at a discount.  Such events would be considered professional suicide – a bankruptcy or downgrade would seriously impinge a firm’s ability to raise debt or equity in the future.  In 2010 the world has changed and the stigma of bankruptcy simply is not what it once was.

As shown in the following table the pace of PE backed bankruptcies in 2009 significantly accelerated in the first half of 2009 and then tailed off dramatically:

 

The types of firms filing for Chapter 11 protection should be no surprise:

 

Was there some economic miracle that started in May to slow down the pace of filings?  The answer is no.  As noted in the peHUB.com article:

“We can attribute the slowdown to a little thing called Amend & Extend (or, as Mark Patterson of MatlinPatterson called it, “Amend, Extend and Pretend”). Midway through the year, lenders realized they couldn’t be complete jerks about their loans if they didn’t want a tsunami of bankruptcy cases on their hands, so they relented, allowing sponsors and their companies to “kick the can down the road” (another buzzy phrase of the year) and extend debt maturities.”

I have some anecdotal evidence to confirm this trend as well.  In December I visited with a number of New York City based hedge funds doing some consulting on market trends in the supply chain management space.  During more than half of the discussions I had we were interrupted with news of a critical meeting to do another ‘amend and extend’ deal. 

You can download peHUB.com’s complete list of PE-backed bankruptcies here.

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