Here’s how private equity works: A firm buys a company with a lot of borrowed money. The now-p.e.-owned company borrows even more money to repay the p.e. owners. The p.e. firm resells the now-heavily indebted company on to the next sucker. Repeat.
In layman’s terms, this is called levering to the hilt. It’s how private equity firms make money: Using leverage to extract as much as they can for themselves and their investors. But it is not the only kind of leverage available to p.e. firms. No! They can lever their leverage, especially when interest rates are laughably low. Leverage, after all, is just debt, and debt is just a contract for money, and contracts have to be negotiated, and the negotiator with more of the other kind of leverage is able to impose more of the terms of the contract than the negotiator with less leverage. In the case of the Blackstone Group, which is raising $13.5 billion to buy Thomson Reuters for $17 billion, it is pretty clear where that leverage lies.
Blackstone’s deal further loosens protections to allow it and its co-owners, including Thomson Reuters, to extract dividends without conducting a basic test of Refinitiv’s financial health…. Dropping this test is unprecedented and along with other changes leaves the covenants “riddled with flaws and loopholes,” according to Covenant Review, a credit research firm. Several lawyers not involved in the deal said they had never seen this restriction on dividend payments removed from any bonds in Europe and couldn’t name one in the bigger U.S. market.
My word! A private equity firm is attempting to make as much money as possible with as few strings as possible. What is this world coming to?