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Moody's: Creditor recoveries in leveraged buyout defaults in line with non-LBOs

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 Defaults."

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 non-LBO companies."

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 defaults.

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.

***

NOTE TO JOURNALISTS ONLY: For more information, please call one of our global press information hotlines: New York +1-212-553-0376, London +44-20-7772-5456, Tokyo +813-5408-4110, Hong Kong +852-3758-1350, Sydney +61-2-9270-8141, Mexico City 001-888-779-5833, S?o Paulo 0800-891-2518, or Buenos Aires 0800-666-3506. You can also email us at mediarelations@moodys.com or visit our web site at www.moodys.com.

David Keisman
Senior Vice President
PPIF
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.

Tom Marshella
MD-US and Amer Corporate Fin
CFG
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Releasing Office:
Moody's Investors Service, Inc.
250 Greenwich Street
New York, NY 10007
U.S.A.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

Moody's: Creditor recoveries in leveraged buyout defaults in line with non-LBOs
No Related Data.

 

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