Buyout firms' portfolio companies face stress

By Megan Davies

NEW YORK (Reuters) - Companies loaded up with debt and taken private in the buyout boom are more susceptible to bankruptcy as the economy contracts, but a wave of Chapter 11 filings is not expected.

Private equity volume peaked last year with nearly $800 billion of leveraged buyouts according to research firm Dealogic. As the economic downturn hits, companies with higher debt levels have less wiggle room to make mistakes or have an earnings crunch.

That is causing concern that the companies private equity firms have in their portfolios could run into trouble, and in some cases it is already visible.

Linens 'n Things, bought in a $1.3 billion buyout led by private equity firm Apollo Global Management in 2006, said Tuesday it is in talks with creditors on a capital restructuring that could bail out the ailing retailer and help it avoid bankruptcy.

Meanwhile, an investor in real estate and buyout firm Blackstone Group (BX.N: Quote, Profile, Research) sued the company on Tuesday, accusing it of failing to disclose in its IPO document that certain of its portfolio companies were not performing well.

But, while the economic numbers get grimmer, the debt default rate has remained surprisingly low. Some argue that there are unlikely to be too many casualties.

"Obviously leveraged companies in a recessionary environment have pressure on them that isn't obvious in a really frothy one," said Stephen Moseley, the president of private equity advisory business StepStone Group LLC.

"There's an impression that many of these highly leveraged deals in 2006 and 2007 are headed for trouble," said Moseley. "But the reality is that because of the terms of the bank deals, even with some operating difficulties, the financial risk in the near term is measurable."