Private-Equity Firms Forced to Kick In More Cash to Shore Up Portfolio Companies

livemint.com:

Private-equity firms are being forced to spend more money to keep the companies they own alive, as rising interest rates disrupt the buyout industry’s debt-heavy playbook. With credit costs at the highest level in years, companies that provide debt for private-equity deals are asking firms to chip in additional equity when they look to refinance, say people who research the leveraged-finance markets and advise private-equity firms on transactions. Private-equity firms typically try to minimize their own equity investment when they buy companies, while maximizing leverage.

Doing so increases their potential profit while minimizing risks. But now banks and private-credit firms want private-equity sponsors to put more skin in the game. Lenders “are being tougher on terms" for refinancing debt, including “requiring more equity to extend loans," said Dafina Dunmore, a senior director at credit evaluator Fitch Ratings who tracks the leveraged-finance market.

Recent debt deals involving additional equity contributions include Prometric Holdings, an educational-services company backed by European buyout firm EQT AB, which last month extended the maturity of a $572 million loan by three years. The transaction included a $120 million equity commitment from EQT, according to Moody’s Investors Service. Also in September, boating-products retailer West Marine was able to restructure about $800 million of debt with the assistance of private-equity owner L Catterton, which provided the bulk of $125 million in new capital.

Neither firm commented on the transactions. The rebalancing of private-equity’s financing mix toward more equity and less debt presents several challenges for private-equity firms. Among them are deciding which