People in glass houses ..

19 May 2008

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Private equity firms buying back the debt that supports their own deals has recently come in for criticism. Europe's trade group for the syndicated loan market, the London-based Loan Market Association, is expected to propose a series of measures that would bar private equity firms from such practices. Several recent reports suggest that the association will attempt to close these so-called 'lending loopholes' which are perceived to give private equity firms an unfair advantage when it comes to buying into and then restructuring the debt that supports their own portfolio companies. Other disapproval seems to rest on a curious politics-of-envy position which criticises private equity firms for buying the debt 'on the cheap' in order to make a profit

This move is astonishingly blinkered and shows how some within the banking community are refusing to take their share of the responsibility for the collapse of confidence in the banking system. There seems little justification for black letter law to restrict the ability of private equity firms to buy into whatever debt they like. Private equity is not to blame for the state of the leveraged loan market. The banks are the ones who agreed to the funding packages and the terms of the loans and are now suffering for their hubris. If private equity is now finding a way to benefit from this the banks should have no complaint.

Happy to let the market dictate when at its peak, the banks cry foul and extol the virtues of regulation when the market turns against them. It could even be preferable to have the private equity sponsor sitting at the table when the debt backing for its portfolio company is being restructured; a private equity firm is less inclined to think like a regular debtor with its equity also at stake. The banks are treading on dangerous ground by suggesting that a 'loophole' exists in the current law while their off-balance sheet practices continue to contribute to the liquidity crisis and threaten a wider recession.

Yours sincerely,

Nathan Williams

Editor, unquote"

Tel: +44 20 7004 7449

nathan.williams@incisivemedia.com.