Univision's junky LBO

Even by the loosy-goosy standards of today's private equity financings, this one really stands out. The L.A.-based Spanish-language media company was bought by billionaire Haim Saban and a bunch of private equity firms last fall for $13.7 billion (including debt) - and the new owners are borrowing $10 billion to get the deal done. That's 12 times earnings before interest, tax, depreciation and amortization, which over the long haul is asking a lot of any company. All the ratings agencies have shoved Univision deep into junk territory (Fitch has the senior unsecured debt as "CCC-plus," which is seven levels below investment grade. The WSJ likens it to buying a house with a subprime loan:

This is now a borrower's market. In Univision's case, $7 billion of its debt is a "covenant lite" loan -- meaning it doesn't contain the usual provisions limiting additional borrowing. Univision is raising a further $1.5 billion in the junk bond market with an issue of so-called pay-in-kind toggle notes. These notes give it the option to pay interest with additional IOUs rather than cash. That could save it more than $100 million a year. Such loose lending practices are reminiscent of recent behavior in the mortgage market. Borrowers took on loans equivalent to the value of their homes. Principal didn't need to be paid back and interest charges were kept artificially low. Mortgage providers also packaged their loans and sold them on.

They acted as if U.S. home prices would never fall. That proved wrong, and now the providers of the riskiest mortgages, such as NovaStar Financial Inc., whose stock has fallen by more than half this month, are suffering. LBO lenders today seem to assume that the business cycle will never turn. That could turn out to be just as dangerous an illusion.