Corporate America: Headed for debtor's prison?

The WSJ.com (paid article) has an excellent piece – called "Buyout Bonanza" – that takes a look at the perils of the buyout craze. That is, Corporate America may be on the fast-track for rapid debt accumulation.

Funnily enough, the article looks at the buyout of a gambling company, Harrah's Entertainment, Inc. (NYSE:HET). The deal has a value of $17.1 billion, of which about $10 billion consists of debt. True, the company has gobs of cash flow: $2.5 billion a year. Yet, this still amounts to more than 8X the value of the debt. That's certainly in the risk zone. Keep in mind that the average deal has a ratio of 5.7X.

The problem is that – with huge amounts of private equity – there are likely to be many more huge companies that go private and as a result, take on huge amounts of debt. In a way, the end of 2006 was a highlight of things to come.

However, if the economy falters – which it is bound to do – we could see a variety of marquee companies dive into default. But so far it's a gamble a myriad of big companies are willing to take.

Tom Taulli is the author of various books, including the Complete M&A Handbook and operates DealProfiles.com.