Looming Wave of Maturing Debt

The Wall Street Journal recently reported on more than $550 billion in debt taken on by European companies acquired in leveraged buyouts which will be reaching maturity within the next five years.

This massive wave of approaching debt repayment obligations is a significant issue for a number of reasons. The PE firms backing many of these highly-leveraged companies have been grappling with the task of adding value in the throes a challenging economic environment, as well as with a reduced ability to exit via secondary deals and IPOs.

In the U.S. we haven't yet experienced the same types of debt problems because of the appetite for high yield bonds in this country. The buyout peak of 2007, which saw nearly $1.6T in deal volume by middle of that year in the U.S. alone, also spurred the creation of a lot of debt in PE-backed companies. We are beginning to see the maturity of that debt. Again, the problem here is that many of those companies haven't grown in the way they were expected thanks largely to a battered global economic landscape. The fallout in the U.S. is a trend of PE companies buying themselves more time on their obligations by refinancing. And these companies are avoiding exorbitant interest expenses in a high yield debt market which, fortuitously, is experiencing low premiums. Last year, KKR alone extended or refinanced nearly $60 billion of debt for its portfolio companies.

But banks across the pond are wary of refinancing the half-trillion in burdens coming due over there, and there is no robust debt market, as in the U.S., which is helping to alleviate the situation. Clearly, all of this debt crashing down at once will lead to a lot of scrambling and, most likely, a lot of restructuring. To exacerbate matters, some analysts are forecasting a growing and sustained debt aversion scenario, even here in the U.S.

This situation, as with any, cuts both ways. The multitude of steeply-leveraged companies and those with meager earnings will continue to struggle to find financing opportunities. And this is could very likely spell the end for many of the zombie companies which have been hobbling along for the past several years. The upside may come for those who will be splitting up the remains.

Specialty sector focused private equity with flexibility and cash position will do well as credit dries up and an acquisition environment looms. And unique funds will have the opportunity to contribute to the type of reorganization that can allow the true economic therapy to begin - putting an end to the zombies and building real commercial and investor value going forward.

Chemistry, Innovation, Economy - Perspectives on Clean Technology (Follow-on)

In 2009 I shared some thoughts here on clean technology development. After some positive feedback I thought it would be appropriate share additional perspectives to do a follow-on piece for 2012.

Clean technology is not a phenomenon that is going away, and that is becoming clearer with each passing year. A few pervasive fundamental drivers exist:

• The same motivating factors that were driving clean tech five years ago still exist, and some (emerging market demand and environmental stress) are even getting stronger
• Clean tech is an incredibly diverse industry and the term reaches into a broad array of business segments
• There is systemic inertia which continues to push toward greater efficiency and reduced environmental impact – not just in energy, but across the spectrum
• Need for sustained innovation and the effect of cost arbitrage

While folks are concerns about sovereign debt, regulatory changes, and increased competition, 2011 was a record year for clean technology deployments and I believe 2012 will be even a better year as capital flow increases and emerging dynamics continue to make the case for clean technology as a worthwhile industry. From energy, to materials, to natural resources, and
even governmental and regulatory action, developing clean technology is a mindset that a host of players are caught up in. And one issue that is frequently misunderstood is the utter scale and pervasiveness of what this area encompasses. To put it simply, clean tech is in play virtually everywhere that matters (e.g. water, smart or renewable materials, clean transportation, electric
vehicles, energy storage, etc.)

Energy issues do not seem to ever go away. Today, there is a lot of regulatory action which is setting out with the goal of correct arbitrage and imbalances between technological development and commodity pricing (think of the corn ethanol subsidy/drawdown). It serves as an impetus
for new tech growth, and that is what is important here. Appropriate regulatory action is certainly not slowing down development, as clean tech is also a politically popular and viable economic movement.

As I have said before, this is a different animal that what we saw in the 90s with the dot-com era (high initial capital infusion followed by a network of low cost start-ups to develop value). Rather, the clean tech industry is one that driven by “tech innovation AND implementation.” That is to say – the dissemination of innovative technology on a broad scale and the ability to ramp up production and utilization sooner rather than later. It is important to balance that point by saying that technology is the driving concern here, and a capital-intensive asset-driven
business is not. Technology developers should be implementing strategies which allow them to advance their developments with lighter asset burdens. Partnerships with manufacturers and high-infrastructure companies while focusing on research and development is a smart play – one which will see faster commercial realization. Once again, a savvy industry focused investor (e.g. specialty venture capital or private equity investment firms) should understand the difference of “asset plays vs. new technology play” and consider review both the immediate capital cost of deployment of a new technology as well as the long-term cash flows and liabilities that can be inherent in such investment consideration.

Nowhere is the implementation need more conspicuous than in sustainable and renewable energy. Traditional energy sources, especially fossil fuels, are creating incentives for their own replacement – both economic and environmental. To scale this sector to the point of wholly replacing traditional energy is far from a realistic proposition in the foreseeable future. What is important at the present moment is to scale deployment of new energy technology while reducing associated costs. The goal is to grow an important supplement to traditional energy, which will mitigate its costs. We are seeing this more every year (think of growth in wind and solar, as examples). Efficiency is another key theme in energy – one that can be addressed by clean tech advancement (but which necessitates the incentives to do so). Regulators can play an important role here. Certainly one of the biggest areas for clean tech development moving forward is powered transportation. Here we see some of the greatest energy consumption (again, particularly fossil fuels) coupled with high environmental impact. This is particularly true for emerging markets, where we see exploding industrialization and associated demand. The impact of these areas cannot be ignored. Much can be done to improve the industry on a technological basis. Fuels, materials, drivetrains, and motors are all components that are ready for innovation. Again, incentives must be in place.

The central theme of my view on clean technology is that it’s an expansive industry, which will provide consistent economic development opportunities moving ahead and chemical and specialty materials industry players are at the forefront of this movement. An innovation in “business of chemistry” could translate into an innovation for “clean technology industry”, and vice versa. What are you views?