大象传媒

Shares in Schadenfreude Inc are soaring to new highs, as evidence accumulates that the private-equity boom of 2006 and early 2007 may be turning into something dark and dismal.

As I mentioned yesterday, even before any pronounced slowdown in the economy, the debt of several British companies acquired by private-equity funds is trading well below par.

Last night, for example, holders of bonds issued by Countrywide 鈥� the UK鈥檚 leading estate agency business 鈥� were nursing very pronounced losses.

Which is unsettling given that the buyout of Countrywide by the US private-equity house, Apollo, was carried out only last May.

It was one of the last private-equity deals of any size to be completed, before the market collapsed in the summer. And the deal valued Countrywide at over 拢1bn.

The takeover was financed with around 拢300m of equity and 拢640m of debt, which were sold to investors as three different kinds of bonds.

There was 拢370m of senior secured floating rate notes, which were priced last night at 76p in the pound.

There was another 拢100m of senior secured floating rate notes that have a toggle, allowing the borrower to pay interest in cash or roll it up depending on whether money becomes tight.

The toggle was a bull-market innovation that transferred power from the lender to the borrower 鈥� in that if a borrower runs into difficulties, it can simply add the interest to the principal owed and delay the day of reckoning.

Perhaps unsurprisingly, these toggling notes are trading at 70p in the pound.

And then there was 拢170m of senior unsecured notes, which is trading at 54.5p in the pound.

All told, providers of Countrywide鈥檚 loans are nursing losses of 拢195m. Which is a lot of humiliation and pain for the lenders. And what seems extraordinary is that we鈥檙e less than six months from the completion of this takeover.

What is the equity worth? Goodness knows. But, in theory, if the debt has fallen in value by that much, the losses on the equity may be spectacular.

Except that, like so many of these top-of-the-market buyout deals, the holders of the equity managed to transfer many of the risks normally associated with the equity to the debt.

As Countrywide itself puts it, 鈥渙ur bonds instruments do not contain any maintenance covenants, only incurrent covenants鈥�. What that means is that if the performance of the business were to run into serious difficulties, bondholders have precious little ability to take control of the business or seize assets unless and until the smelly stuff is all over the fan.

So perhaps the equity will be worth something one day, if Countrywide comes through the next phase in the housing cycle in reasonable shape.

What鈥檚 actually been happening to Countrywide as a business? Well Countrywide鈥檚 third-quarter results, which have this morning been sent to its bondholders, show that conditions are becoming tougher for it 鈥� though it is cutting costs and it has succeeded in increasing the cash that it holds on its balance sheet as a protection against elements.

Its revenues fell 6% to 拢167m in the three months to the end of September. As for the measure of profit favoured by private-equity owners, earnings before interest, tax, depreciation and amortisation, that fell 5% to 拢31.9m. And Countrywide generated a useful amount of incremental cash in the period.

The more forward-looking measures make for gloomier reading. The pipeline of sales for the company going into the last quarter of the year is 16% lower than at the start of the second quarter 鈥� and the volume of properties on its books rose 5% over the summer as properties took longer to shift.

Why has the price of its debt fallen quite so much?

It鈥檚 partly that loans to buyouts are out of fashion right now.

And it also shows what providers and buyers of the loans think of the outlook for the British housing market 鈥� which, to state the obvious, isn鈥檛 very positive.

In a way, Countrywide is part of the same phenomenon as the calamitous factors that brought us the crisis at Northern Rock: financial institutions鈥� newly found dislike for certain kinds of debt created in what they see as the bubble conditions of 2006 and early 2007; and their particular wariness of anything dependent on the volume and price of house sales.

Anyway, the vendors of Countrywide should be feeling pretty chirpy. They appear to have sold right at the peak.

Actually there was another big private-equity takeover of an estate agency chain that was completed just a few weeks later.

That was BC Partners purchase of Foxtons for 拢380m, financed by 拢180m of senior debt, 拢70m of mezzanine debt and 拢130m of equity.

The banks that provided the 拢250m in aggregate of loans for the deal, Bank of America and Mizuho, are thought still to be holding much of it. And like many big banks, they are probably singing the buyout blues.