A recent flurry of debt-financed corporate buyouts risks destabilizing world financial markets, the International Monetary Fund warned earlier this week. In its latest "Global Financial Stability Report," the IMF noted that so-called leveraged buyouts (LBOs) by private equity funds, which finance takeovers of companies through borrowed money, have seen a "massive increase."
The surge in LBOs has been spurred by a "desire to reduce the scrutiny associated with being a public company" and a big influx of cash from investors into private funds, the IMF said. "The LBO-acquired firms that have become heavily indebted may be more vulnerable to economic shocks," the report warned.
"A collapse in one or more high-profile deals could leave banks with exposure during a syndication stage and could trigger a wider reappraisal of risks across a broader range of credit products."
After emerging in a big way in the 1980s, LBOs reached a record level in 2006 with more than half the deals happening in the United States. Their worldwide value stood at nearly $600 billion, a 70% rise over 2005, according to the corporate consultancy Dealogic.
Copyright Agence France-Presse, 2007