Unlike the 2008 financial crisis, when the big Wall Street banks were all teetering on the edge of bankruptcy and most needed federal bailouts, this time around—we’re told repeatedly—Wall Street is just fine and the protections and regulations imposed on it by Congress and the Federal Reserve have proved effective. But financial risk doesn’t just disappear because it’s not being stored at JPMorgan Chase, Bank of America, or Goldman Sachs.
Here come the lawnmowers. The economic consequences of the COVID-19 pandemic have been widespread of course, and few companies have been spared, save perhaps Amazon, Netflix, and an amazingly resilient Apple. It’s no surprise, then, that a large swath of pain is being felt by the companies that made it their business to buy loans originated by private-equity firms that buy companies and load them up with debt.
One way to assess that struggle and get a sense of just how raw this economic crisis will be, once the full impact of it is known, is to look at the financial companies that provided the loans to the private-equity firms that bought a swath of small and medium-size businesses in the last decade, levered them to the hilt, and now have to deal with the consequences.
In its report on the Golub Capital rights offering, Keefe, Bruyette & Woods, a highly respected investment bank focused on the financial sector, wrote that it was “surprised” by the Golub rights offering, which was equal to 25% of its outstanding shares. “This was surprising to us given their solid balance sheet and the timing is very early in the cycle,” the bank wrote.
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