Dutch central bank warns on buyout risks

De Nederlandsche Bank, the Dutch central bank, has warned financial institutions of the risks involved with private equity buyouts in a report on financial stability in the Netherlands.
 
While offering benefits such as cost reductions and improved efficiencies in investee companies and diversification in the portfolios of investors, the increased activity in private equity, and buyouts in particular, has aggravated financial risks said the bank in its semi-annual Overview of Financial Stability in the Netherlands.
 
The amount of debt in leveraged buyouts had increased due to low interest rates, high risk tolerance and increased liquidity, the report said: “There are signs of a rise in the debt position of companies which were recently acquired by private equity. These higher levels make them more vulnerable to an economic downturn.”
 
In addition, there is uncertainty as to where the credit risk ends up once banks have syndicated loans, with competition amongst loan providers also generating a “trade-off between adequate risk assessment and competitive price-setting of loans”.
 
The bank said that it would be participating in a European Central Bank analysis of the European banking sector’s involvement in private equity this year.
 
Large buyouts in the Netherlands this year include the take-private of media and marketing business VNU, sold to a private equity consortium for €8.7 billion ($11.1 billion), and Apollo Management’s acquisition of the logistics business of mail group TNT for $1.48 billion (€1.16 billion) last month.
 
According to Dutch newspaper De Telegraaf, a recent poll said that 85 percent of people felt that the country was selling out its domestic businesses to foreign investors.
 
Standard & Poor’s ratings services warned European lenders earlier this year to take full account of recovery prospects when committing to leveraged loans. The ratings agency said that credit discipline was being undermined in the scramble for assets.