Gathering of the vultures

9 April 2006 By Taron Wade

Leveraged companies may find their debt in the hands of unfriendly vultures, rather than patient banks. That’s because institutional investors have edged out banks in buyouts. And they’re not likely to hang around when the going gets tough.

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Institutional investors now provide 40% of debt financing for buyout firms. Five years ago private equity firms borrowed solely from banks.

In March, private equity funds KKR and Texas Pacific Group announced they were setting up funds to buy securities of distressed companies. Blackstone last year set up a $500m vulture fund.

In the last few weeks, the iBoxx index of corporate bonds, a closely watched indicator of bond market sentiment, widened to 63 basis points over swaps so far. That's almost back to where they were after the downgrades of Ford and GM. Meanwhile, US 10year Treasury bond yields have risen to 4.9% from 4.3%. The 10year yield hasn't been at 5% since 2001.

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