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Back floating rate debt. Is this the next financial crisis?
Posted on 3/17/25 at 8:23 pm
Posted on 3/17/25 at 8:23 pm
Basically private equity is using a version of the 2008 Financial Crisis using a very not well known financial tool called back floating debt.
Essentially private equity have taken out low interest loans on the private retail outlets they have majority interest in and as collateral they use the retail outlets cash flow to service the loans.
Just like in the 2008 Financial Crisis mortgages were package into collateralized depth obligation (CDOs), well these private equity loans are package and sold to pension funds also in the form of Collateralized Loan Obligations (CLOs). The problem is these CLOs are filled with back floating rate debt loans which is a euphonism for an adjustable rate loan.
These loans have started to adjust and once cash flow rich businesses like Party City, Joann’s, Forever 21, Big Lots, Hooters, etc. (all owned by private equity) are no longer cash flow rich, can't meet the new loan payments and are declaring bankruptcy.
Here's the problem, the pension funds holding on to these CLOs will be left holding the bag.
Here is a twitter thread on the subject.
LINK
Thoughts?
Essentially private equity have taken out low interest loans on the private retail outlets they have majority interest in and as collateral they use the retail outlets cash flow to service the loans.
Just like in the 2008 Financial Crisis mortgages were package into collateralized depth obligation (CDOs), well these private equity loans are package and sold to pension funds also in the form of Collateralized Loan Obligations (CLOs). The problem is these CLOs are filled with back floating rate debt loans which is a euphonism for an adjustable rate loan.
These loans have started to adjust and once cash flow rich businesses like Party City, Joann’s, Forever 21, Big Lots, Hooters, etc. (all owned by private equity) are no longer cash flow rich, can't meet the new loan payments and are declaring bankruptcy.
Here's the problem, the pension funds holding on to these CLOs will be left holding the bag.
Here is a twitter thread on the subject.
LINK
Thoughts?
7
Posted on 3/18/25 at 6:59 am to GumboPot
quote:
Thoughts?
Every time I read a story about private equity it seems to end in failure.
Posted on 3/18/25 at 8:28 am to GumboPot
Its not the old days of pension funds where a retired deputy sheriff named Carl buys a golf course for his fund.
They have professionals that handle acquisitions and investing and no pro with his eye on the ball is going to buy this rolled up dogshit unless its for a tax advantage.
They have professionals that handle acquisitions and investing and no pro with his eye on the ball is going to buy this rolled up dogshit unless its for a tax advantage.
Posted on 3/18/25 at 8:29 am to SlowFlowPro
quote:
Every time I read a story about private equity it seems to end in failure.
Ever thought it's just because you hear about the failures?
Posted on 3/18/25 at 8:31 am to SlowFlowPro
quote:
Every time I read a story about private equity it seems to end in failure.
Its where smart investors have their money (not all their money). The stock market and the concept of publicly traded companies is an afterthought compared to 30, 40 years ago.
Posted on 3/18/25 at 12:38 pm to GumboPot
quote:Ah yes, the periodic "CLOs ARE EVIL!!!" stupidity.
Thoughts?
Yellen tried to do this back in 2016/17 and went so far as comparing to subprime crisis in the making. It was stupid then and stupid now.
It's no secret that shitty companies take on debt. Some of them will default. Some of those defaults will involve losses. It's lending. The current default rate is like .30%. Long term rate is like 2%. Who cares.
CLOs are radically superior in structure to CDOs.
There has NEVER been a vintage year of CLOs that experienced an ultimate negative IRR.
A sell off in credit markets is actually long-term GOOD for CLOs, as the CLO manager will then go shopping for loans to invest in at lower prices.
I can go into much more detail if anyone is actually interested, but the tweet in the OP is just doomer porn.
Posted on 3/18/25 at 9:36 pm to Lakeboy7
quote:
Its where smart investors have their money (not all their money). The stock market and the concept of publicly traded companies is an afterthought compared to 30, 40 years ago.
I’ve been kicking the tires on some private equity funds and have been surprised at the lack of PE discussions on Money Talk. Honestly, it’s part of my hesitation. No one discusses it here, so I assume that I’m missing something.
This post was edited on 3/18/25 at 9:36 pm
Posted on 3/18/25 at 10:53 pm to Finnish
quote:
I’ve been kicking the tires on some private equity funds and have been surprised at the lack of PE discussions on Money Talk. Honestly, it’s part of my hesitation. No one discusses it here, so I assume that I’m missing something.
I jumped in last year and invested in the company my wife went to work for. Had the evaluations a couple months ago and I’m up 50% on paper on my investment, but I got in fairly early. Company is growing like crazy right now so it will be interesting to see what happens in year two. I doubt it will be 50% again
Posted on 3/19/25 at 7:23 am to Rize
Same. I put 50k in a robotics start up my gf went to work for after she retired from Honeywell.
It’s a lot of faith but I had better intel than most. GF had worked with the people that brought it off the ground, knew the products, the model and clientele. The end game is to get acquired at a ridiculous number and go do it again. Going public for a business like this is not even a consideration.
It’s a lot of faith but I had better intel than most. GF had worked with the people that brought it off the ground, knew the products, the model and clientele. The end game is to get acquired at a ridiculous number and go do it again. Going public for a business like this is not even a consideration.
Posted on 3/19/25 at 9:08 am to Finnish
quote:
I’ve been kicking the tires on some private equity funds and have been surprised at the lack of PE discussions on Money Talk. Honestly, it’s part of my hesitation. No one discusses it here, so I assume that I’m missing something.
I've been in BX for awhile and over the years traded in and out of CG and KKR. The all have some PE components in addition to their financing, real estate and whatever else they got going.
Posted on 3/19/25 at 10:38 am to Lakeboy7
quote:
They have professionals that handle acquisitions and investing and no pro with his eye on the ball is going to buy this rolled up dogshit unless its for a tax advantage.
That’s the same thing people said before the SHTF in 2008.
Posted on 3/19/25 at 11:57 am to Warfox
Na, most retirement associations had their own people running the funds. And they bought lots of overpriced dogshit, like golf courses.
But if a fund advisors buys that crap and it flatlines, so what?
But if a fund advisors buys that crap and it flatlines, so what?
Posted on 3/20/25 at 6:07 am to Finnish
quote:
I’ve been kicking the tires on some private equity funds and have been surprised at the lack of PE discussions on Money Talk
I’d be interested In thoughts on PE as well.
I’ve had some interaction with a few PE transactions and several of these firms seem like a house of cards. Buy out owners, borrow to buy other companies over and over again solely to aggregate size and then hope to sell for a multiple. Upper management’s goal is to flip the company or go public over managing the business and the company is taking on the additional debt load…not the PE firm. When they go bankrupt it’s a cluster.
This post was edited on 3/20/25 at 6:09 am
Posted on 3/20/25 at 6:21 pm to Big Scrub TX
Would love a better explanation here. I work in money management and a client actually sent me the twitter video linked by OP, it's almost like she is the only one who has connected these dots on her PE is evil, only small biz should survive crusade.
Can you go into more detail and how I can alleviate my clients fears beyond just telling him this has no basis and is fearmongering?
Can you go into more detail and how I can alleviate my clients fears beyond just telling him this has no basis and is fearmongering?
Posted on 3/20/25 at 9:34 pm to SendItSteve
quote:It's just lending. In all lending since the dawn of time, some loans have gone bad. That's called the default rate. Focusing on one or two negative outliers doesn't tell us anything.
Would love a better explanation here. I work in money management and a client actually sent me the twitter video linked by OP, it's almost like she is the only one who has connected these dots on her PE is evil, only small biz should survive crusade.
Can you go into more detail and how I can alleviate my clients fears beyond just telling him this has no basis and is fearmongering?
Posted on 3/22/25 at 11:02 am to SquatchDawg
quote:
I’d be interested In thoughts on PE as well. I’ve had some interaction with a few PE transactions and several of these firms seem like a house of cards. Buy out owners, borrow to buy other companies over and over again solely to aggregate size and then hope to sell for a multiple. Upper management’s goal is to flip the company or go public over managing the business and the company is taking on the additional debt load…not the PE firm. When they go bankrupt it’s a cluster.
It’s these loans many variable rate that are going to blow up.
Finance is committing vampirism against Mainstreet.
Combined with the off-shoring of manufacturing the last 40 years and here we are.
You can’t tell me that we are stronger than we were 40 years ago.
Posted on 3/22/25 at 3:06 pm to Warfox
quote:That's great doomcasting with very little detail. None of you know what you're talking about.
It’s these loans many variable rate that are going to blow up.
Finance is committing vampirism against Mainstreet.
Combined with the off-shoring of manufacturing the last 40 years and here we are.
You can’t tell me that we are stronger than we were 40 years ago.
Posted on 3/23/25 at 5:55 am to GumboPot
Back floating rate debt. Is this the next financial crisis
Failure to hold people accountable and let them feel the reality and consequences of their actions is the true crisis in this country. From free healthcare for the morbidly obese to bailing out the banking industry.
Failure to hold people accountable and let them feel the reality and consequences of their actions is the true crisis in this country. From free healthcare for the morbidly obese to bailing out the banking industry.
Posted on 3/23/25 at 7:26 am to GumboPot
Most private equity firms will come in buy up the business and assets. Then start selling the real estate to float that as expanded profits that go straight back into the private equity firms. Then they then start merging and consolidating services and then start loosing customers as the business starts to suffer and private equity firms build up debt transferring proceeds of the loan back into the private equity firm’s hands. Then they have a shell of a former company that they bought was flush with cash at the start that is now broke and teetering on bankruptcy.
Posted on 3/23/25 at 8:31 am to SlowFlowPro
quote:
Every time I read a story about private equity it seems to end in failure.
Guess you haven't read anything or are aware of the small E&Ps and water management companies backed by private equity out of Abilene and NYC.
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