Default and Migration Rates for Private Equity-Sponsored Issuers

Abstract

This study examines historical default, credit loss and migration rates for North American speculative-grade non-financial issuers owned by private equity sponsors. We find that in the three years after being acquired by a private equity sponsor, speculative-grade sponsored issuers experience roughly 60% higher default rates than other speculative-grade non-sponsored issuers; and they experience downgrade-to-upgrade ratios almost double what they are for non-sponsored issuers around the time of the acquisition. Additionally, the impact of sponsorship on creditworthiness varies considerably across firms. In particular, while the credit performance of firms that were relatively strong at the time of the acquisition (e.g., rated Ba) tends to deteriorate after they are acquired, the default rates and downgrade rates of firms that were already in distress (e.g., those rated Caa or below) are lower after the acquisition than those of similarly rated non-sponsored issuers, suggesting a potential white-knight role for private equity sponsors. We also find that Moody's has on average adjusted ratings appropriately after private equity takeovers. Specifically, we find that default rates by rating category for sponsored issuers and non-sponsored issuers are roughly similar.