KEY POINTS:
The Reserve Bank of Australia has warned against the long-term economic risk of the leveraged buyout boom being experienced in across the Tasman.
According to the bank's quarterly statement on monetary policy, the value of Australian company leveraged buyouts has grown to A$27 billion in 2006 - up from an average of A$1.5 billion over the previous five years.
"Given the run of strong market performances in recent years, it is not surprising that there are signs of increased appetite for risk. This is most visible in the marked increase in merger and acquisition activity, particularly leveraged buyouts, in many economies," said the RBA.
But the RBA warned the increase in the bought-out companies' debt-to-equity ratio, funded by low cost of debt relative to the expected return on assets, made them more vulnerable to rising interest rates or economic slow-down.
"To date, the impact on the broader economy has likely been limited, as only a very small proportion of the Australian corporate sector has been acquired through LBOs," said the RBA.
"But if the current surge in LBO activity continues for some time, the increase in corporate leverage could become a longer-term risk to macroeconomic stability."
The RBA said strong inflows into private equity funds, largely from superannuation funds, and a favourable economic outlook have contributed to the increase in leverage buyout activity.
- NZ HERALD STAFF
