Private Equity-Owned Companies Fuel Surge in Defaults

Companies backed by Blackstone, Apollo, and KKR have defaulted in the second quarter, according to Moody’s.

Paul Hanna/Bloomberg

Paul Hanna/Bloomberg

Private equity-backed companies are driving defaults in the Covid-19 recession, with companies owned by Blackstone Group, KKR & Co., and Apollo Global Management among those that have run into trouble, according to Moody’s Investors Service.

More than half of companies that defaulted in the second quarter are owned by private equity firms, Moody’s said in a report this week. For example, Blackstone-backed Gavilan Resources and Apollo’s CEC Entertainment filed for bankruptcy, while KKR’s Envision Healthcare Corp. defaulted through a distressed debt exchange.

U.S. defaults have more than tripled since the end of the first quarter, as companies with buyout debt proved vulnerable in the downturn, according to Moody’s. The credit rater expects the default rate to keep rising to about 12 percent next year as it continues to be fueled by private equity-owned borrowers, according to Moody’s analyst Julia Chursin, who spoke to II by phone Friday.

Chursin said that private equity firms, being skillful financial engineers, will try to avoid bankruptcy through distressed debt exchanges. While still constituting a default, debt swaps can help buyout firms salvage their equity stakes as the company’s lenders take a haircut.

“We expect in the current downturn that if the company is owned by a private equity sponsor, they will opt for an out-of-court debt restructuring,” she said. “These companies will try to kick the can down the road and ride out this default cycle.”


A majority of the defaults by private equity-backed companies in the second quarter were due to distressed debt exchanges or missed interest payments as they negotiated with lenders, according to Chursin. Beyond Envision, other examples of distressed exchanges included Ares Management-backed Guitar Center and Blackstone-owned RGIS Services, Moody’s data show.

[II Deep Dive: Buyout Firms Will Make the Next Downturn Worse, Moody’s Says]

The oil and gas, services, and retail sectors have been particularly hard hit, representing almost 60 percent of defaults in the second quarter, according to the report.

Texas oil and gas producer Gavilan Resources filed for bankruptcy in mid-May, according to state court documents, while CEC Entertainment, the parent of company of Chuck E Cheese, announced in June that it filed for protection under Chapter 11 of the U.S. bankruptcy code. In another failed private equity deal, J. Crew Group, backed by Leonard Green & Partners and TPG, filed for bankruptcy in May.

Chursin said the U.S. default rate has risen in the pandemic to 7.3 percent, above the historic average of 4.7 percent.

Private equity firms have mostly held back from investing more equity in companies they own to help them through tough times, according to Chris Padgett, the head of leveraged finance at Moody’s. That would hurt their returns.

“For the most part, they haven’t put in additional equity,” Padgett said during the phone interview. “They’re really more likely to use some negotiation with the lenders.”