Wednesday, December 13, 2006

The Governor is worried...

About private equity funds. I outline his concerns this morning, as detailed below the fold

Australia's Reserve Bank says it is concerned about the growth in
leveraged buyouts financed by private equity funds.

In his second speech since becoming Reserve Bank Governor Glenn
Stevens said last night that leveraged buyouts of the type arranged
for Channel Nine and proposed for and Qantas were increasing
Australia's venerability to financial stress.

He said that the Bank and Australia's big private banks recently
conducted a macroeconomic stress test in which they simulated the
effect of a very large fall in house prices, a recession, a big rise
in unemployment and a sharp depreciation.

He said there were no widespread loan defaults and the banks
themselves remained "well and truly solvent".

However he said if leveraged buyouts mainly funded by private equity
funds continued to expand the results would become "more worrying".

Until this year leveraged buyouts in Australia were worth around $1.5
billion per year. In 2006 they jumped to around $13 billion.

Mr Stevens said that number still accounted for only a small
proportion of Australian mergers and acquisitions, but there was a
feeling that the growth could continue. The buyouts were essentially
a bet that Australian share prices would remain strong and the cost of
debt would stay low.

"We may at some stage face less forgiving circumstances than we have
enjoyed over the past decade," he said. "We need to be alert to the
shift in the wind in the area of corporate leverage that seems to be
occurring. I suspect we will be talking about that for some time to

Dr Stevens told the Committee for the Economic Development of
Australia in Melbourne that he wanted to perform financial stress
tests more often.

"We have indicated to the chief executives of the participating banks
that we would look to do this type of stress test roughly once every
two years, and I look forward to their support for this," Dr Stevens

In answers to questions at the CEDA dinner Dr Stevens said that he
that the housing construction cycle may have bottomed out.
Australia's very low rental vacancy rates lent support to this view.

He that his opinion about Australia's economic outlook had not changed since the Bank's last hike in interest rates in early November.