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Private Equity Deals and Instability

. Janet Yellen, the former chair of the U.S. Federal Reserve, told the Financial Times last month that she was worried by a “huge deterioration” in corporate lending standards.
November 26, 2018

Private equity deal makers are pushing buyout values to levels not seen since 2007, as they ride a wave of cheap debt, according to a report in the Financial Times. Although the deals may not be as large in the last buyout bubble, today’s deals are again fueled by supersized portions of cheap debt, with few strings attached. In about half of this year’s deals, private equity firms were able to raise debt financing up to at least six times the annual earnings before interest, tax, depreciation, and amortization of the company they bought.

This is starting to raise alarm bells. Janet Yellen, the former chair of the U.S. Federal Reserve, told the Financial Times last month that she was worried by a “huge deterioration” in corporate lending standards, particularly for leveraged loans. The IMF has also singled out leveraged loans as a potential source of financial instability.

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