Del Monte Buyout Financed with Cheap Debt

March 7, 2011

I’ve posted before about the Del Monte buyout by KKR, but Bloomberg’s recent story about how the deal was financed is nearly as interesting.  KKR’s hostile takeover artist Henry Kravis bragged about how easy it was to fund the buyout:

“It’s probably the most attractive financing that we’ve ever done,” Kravis said in a speech in Paris yesterday at a conference organized by political-science university Sciences Po. “The financial markets rebounded much faster than the economy.”

Kravis added that “Low interest rates are pushing financial institutions and pension funds to buy riskier assets because they are looking for better returns.” 

It feels like this is how a bubble begins.  When pension funds are starting to buy high-yield (“junk”) bonds to achieve benchmarks in a low-interest environment, it follows that the fund might continue buying these high risk securities until those securties are inflated in price and overconcentrated in portfolios.  Good pension fund managers won’t get greedy when they start seeing good returns in risky securities.

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