Buyout risk may weigh on credit as stocks fall

NEW YORK (Reuters) - U.S. corporate balance sheets are in strong shape with low debt and high levels of cash, but as stock prices fall the risk of companies leveraging their balance sheets is rising, Gregory Peters, head of U.S. credit strategy at Morgan Stanley, said on Tuesday.

"From a fundamental standpoint corporate America is still in very fine shape ... there has been a slow, much slower process than we thought of releveraging balance sheets," Peters said, speaking at the Reuters Investment Outlook Summit in New York.

However, "the biggest risk to credit is a sideways-to-down (stock) market," Peters said. "That's a real danger, opening up leveraged buyout risk again," he said.

Stock prices have plunged over the past month on growing concerns that economic growth will suffer from higher inflation and interest rates.

Falling stock prices may make companies more attractive to private equity buyers who aim to enhance the companies' stock price, but who often finance the acquisition with substantial debt.

Credit investors started the year concerned there would be a rash of leveraged buyouts as assets in private equity funds swelled, however, credit spreads rallied through the first quarter as this risk failed to emerge.

"As stocks continue to trade flat or down, that opens up a Pandora's box," Peters said.

Energy companies may be among the more likely candidates to be acquired in a leveraged buyout as they are cheap on a reserve basis and have low leverage, while technology firms may also be sought after due to their high cash balances, low leverage and relatively low stock prices, Peters said.

Homebuilders are also cited as likely candidates for buyouts as the companies also have high levels of ownership by management, which may facilitate a deal, Peters said. The possibility that the industry may have peaked, however, may also be making the companies unattractive to some buyers, he said.