Want to get peoples thoughts on this and see where some may agree or disagree.
Essentially I have this belief from talking to clients over the past couple weeks. The private equity market has gotten so large and private equity backed companies make up such a large percentage of our economy. So as many of you know when these get purchased they are often done with debt (highly levered) and essentially no liquidity other than a line (more debt).
I’m thinking that the CV will cause a corporate credit problem because when there is such a large disruption in operations and revenue (let’s say 15%) many of these companies will not be able to afford to make interest payments. This will of course cause defaults/bankruptcies, which will then cause layoffs, which will then cause mortgage and personal loan problems, which of course is recession territory and a formula for market collapse.
Thoughts? Where am I off
The GFC was never fixed, so there are still underlying questions of credit being an issue. That said, I think that given the significant uncertainty going on with CV, investors may be more willing to work with levered companies that default and there will be a significant amount of restructuring work going on in order to keep these companies afloat. While I expect layoffs to happen, as tied to any recession, anything that can be remotely tied to the Coronoavirus (ex. poor performance, declining revenues, etc.) and will give the media and the public significant fuel to create a renewed uproar against PE. I think that, keeping that perception is reality, if your clients are aware of the hard times coming, they may be proactive in order to help keep things running properly at these portcos and try to limit the excess fallout if possible. No one wants to be known as the owner of a business that laid off 50% of its workforce because Covid-19 led to a recession. Just my 2 cents though.
Good point it all makes sense. I think CV is more likely to be the catalyst that sparks other catalysts though like subprime auto or mortgages (again). I think the initial phase is what you mentioned which are the layoffs
Oh, I definitely think that the initial phase is going to be the worst. The layoffs are going to suck, and really do think that the media will go hog wild on PE companies if it happens en masse across multiple industries. When we think back to 2008, the initial shock of Lehman was a bit too much to handle considering the "sudden" onset of the massive downturn in finance. I think that this won't have that luxury and any sort of mass layoffs that happen will be looked at under more scrutiny, especially if they are coinciding with restructuring and defaults.
True. This was my logic as I have been in the diligence phase of a home purchase that’s coming to an end in a week and I’m debating pulling out because I can’t help but think this will cause a large decrease in home prices
I get it. I think the tradeoff there is locking in such a low rate vs waiting. Depending on where you buy, I would think that the question is how far off the home price peak are we vs where will it be in 6-12 months.
Well rates are only going to get lower through all of this. The real question, which you mentioned, is the impact to home prices which definitely is impacted by the number of layoffs and how truly levered people are (which I believe is very high)
so what happens all the PE firms will layoff their employees?
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