When a leveraged buyout flops

One reason leveraged buyouts (LBO) appeal to lenders is that they are secured by the assets of the company being purchased. In theory, if the deal does not work, the lender acquires that security. In practice, if an LBO loan is improperly structured and the company goes bankrupt, secured lenders ris...

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Bibliographic Details
Published in:ABA banking journal 1986-10, Vol.78 (10), p.114
Main Authors: Much, Paul J, O'Dea, Dennis M
Format: Magazinearticle
Language:English
Subjects:
Advantages
Analysis
Balance sheets
Bank loans
Bankruptcy
Banks
Cash flow
Disadvantages
Failure
Fraud
LBO
Leveraged buyouts
Litigation
Management
Risk
Risk management
Underwriters
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Summary:One reason leveraged buyouts (LBO) appeal to lenders is that they are secured by the assets of the company being purchased. In theory, if the deal does not work, the lender acquires that security. In practice, if an LBO loan is improperly structured and the company goes bankrupt, secured lenders risk losing their priority claims on the assets. The risk of attack on the bank's security interest is particularly grave because there are only a few good LBO candidates, and these are assuming higher levels of debt. These factors will lead to more LBO bankruptcies, and loans to LBO companies may be attacked under fraudulent conveyance laws. Banks can minimize their risks by assuring proper pricing and structuring of LBO loans so the transaction cannot be questioned. An independent legal analysis of the deal will determine capital adequacy after the LBO is completed and answer questions of solvency and debt serviceability.
ISSN:0194-5947
2161-5101