Event Risk: It's Different This Time

Credit analysts do their best to assess the likelihood of timely payment, considering the business and financial risks of issuers when they make their investment recommendations. Event risk harms bondholders in varying degrees, ranging in severity from a debt-financed acquisition to a debt-financed stock buyback to that greatest of nightmares, a leveraged buyout. Every wave of event risk is different from its predecessors. The most obvious thing that has changed today is the capital-market environment, or credit complacency. This month saw two unprecedented examples of event risk in unusual places. The first was the announced private-equity takeover of an electric utility, Duquesne Light Holdings. The second was a planned monumental return of cash to shareholders by Mirant.