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Global Credit Research - 05 Jun 2012
New York, June 05, 2012 -- Creditor recoveries when US leveraged buyouts default are nearly equal
to recoveries in non-LBO defaults, Moody's Investors
Service says in a new special comment, "Lessons from 200 LBO
Of the more than 1,000 US defaults in Moody's Ultimate Recovery
Database, 200 involved companies that had undergone leveraged buyouts
since 1988. The average family recovery in those LBO defaults was
54%, compared with 55% in the more than 800 defaults
at companies that had not experienced LBOs.
"The high leverage of LBOs has not translated into lower creditor
recoveries in defaults of companies with private equity owners or other
financial sponsors," says David Keisman, a Moody's
Senior Vice President and author of the report. "While the
LBO sponsors could not spare these companies from defaulting -- and
may have prompted defaults through high leverage -- the average family-level
recovery rate in these situations was nearly the same as the rate at the
One of the main reasons LBO recoveries have been in line with non-LBOs
is the high proportion of distressed exchanges and prepackaged bankruptcies
among defaulted LBOs. These types of defaults typically yield higher
family-level investor recoveries than regular bankruptcies.
Less than half of LBO defaults occurred through regular bankruptcies (not
prepackaged), compared with nearly two thirds of non-LBO
defaults, Moody's said.
The average recovery for the bank debt at the top of a company's
capital structure was less in LBO defaults (75%) than in non-LBOs
(83%) because the wide use of bank debt in LBOs left a smaller
cushion of subordinated debt tranches to takes losses first.
"This smaller debt cushion under bank debt might also help motivate
distressed exchanges," said Keisman. "Although
sponsors have strategic incentives for distressed exchanges, they
may also pursue an early default via distressed exchange when a company
comes under stress in order to leave the bank debt untouched. LBO
sponsors need to preserve positive relationships with banks in order to
maintain access to future deal funding."
Sponsors' preference for distressed exchanges and prepackaged bankruptcies
is also reflected in a lower rate of liquidations compared with non-LBO
defaulters. Nine percent of the LBO defaults in Moody's study
went straight to liquidation, compared with 18% of non-LBO
The study also revealed that average recoveries were very similar for
LBOs and non-LBOs in both "asset-heavy" industries
such as manufacturing and "asset-light" industries
such as technology. This finding contradicts the view that asset-heavy
companies yield better investor recoveries than asset-light companies
because they have more assets available to creditors in liquidation.
The likely reason is that lenders incorporate a company's asset
characteristics in their lending decisions, with asset-light
companies constrained to lower debt levels relative to asset-heavy
companies, Moody's said.
Moody's research subscribers can access this report at http://www.moodys.com/research/Leveraged-Buyouts-Lessons-from-200-LBO-Defaults--PBC_142361.
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Senior Vice President
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
MD-US and Amer Corporate Fin
Moody's: Creditor recoveries in leveraged buyout defaults in line with non-LBOs
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
No Related Data.
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