Q8B, Schweser exam 3 am, Vol 1. Question (p.151): Explan how distressed debt may be used to create equity positions in a leveraged buyout. Solutions says (p.273): “If an leveraged buyout goes sour, and the debt issued becomes distressed, the firm may experience bankruptcy. In such case, the firm’s debt holders can often seize control of the firm, exchange their debt of equity, and emerge as the new equity holders.” I understand what the solution is saying. My question is: Is this something special with leveraged buyout only? The question seems to hint this way. - sticky
I just got one of those letters last week from a law firm “[blah] has changed their filing status from Chapter 11 to Chapter 7. All claims will be suspended for the time being”. Yikes. Where’s my equity? Anyway, I don’t think there’s anything special about LBO’s here except that an LBO is probably more likely to go under because of over-leverage rather than operating problems. If the problem is just cash flow to service the debt, but the company is otherwise functional it’s a capital structure problem and the company needs more equity/less debt. Having that happen through a bankruptcy court is the stupidest thing in the world, but it happens…
sticky Wrote: ------------------------------------------------------- > Q8B, Schweser exam 3 am, Vol 1. > > Question (p.151): Explan how distressed debt may > be used to create equity positions in a leveraged > buyout. > > Solutions says (p.273): > > “If an leveraged buyout goes sour, and the debt > issued becomes distressed, the firm may experience > bankruptcy. In such case, the firm’s debt holders > can often seize control of the firm, exchange > their debt of equity, and emerge as the new equity > holders.” > > I understand what the solution is saying. > > My question is: Is this something special with > leveraged buyout only? The question seems to hint > this way. > > - sticky I always thought that the best way to get equity out of distressed is to do what is called “prepackaged bankruptcy” If PE firm doing LBO and company goes under they will lose their all equity in the company (unless ofcourse they payed themself through special dividend [forgot what was the name of the dividend]
A prepackaged bankruptcy is just a bankruptcy in which management works with creditors to come up with an acceptable reorganization plan. It probably leaves equity investors with nothing since they are probably not at the table.
JoeyDVivre Wrote: ------------------------------------------------------- > A prepackaged bankruptcy is just a bankruptcy in > which management works with creditors to come up > with an acceptable reorganization plan. It > probably leaves equity investors with nothing > since they are probably not at the table. Exactly, so i dont see how > Question (p.151): Explan how distressed debt may > be used to create equity positions in a leveraged > buyout. I thought in LBO, LBO firm issues short term debt to finance LBO and then issues LT debt using the company it aquired to roll over the debt. So i dont really see how equity will come out of distressed unless there is bankruptcy procedings. I might be completely wrong
all they are saying is that as the distressed debt investor, if things turn south for the co, current equity holders (LBO fund or public mkt investors) get flushed and you as the debt holder now control the company, i.e., you own the equity - - it’s a primary focus of most distressed debt investors - - How much is this company going to be worth when i own it
I don’t think equity can come out of debt without bankruptcy (or convertible securities if everything goes really well). Except your idea is that the solution may not be complete and distressed debt can be used in some other way to create equity in an LBO besides bankruptcy. Numi seems to know this kind of stuff…
i understand but the question is kinda stupid though… LBO has nothing to do with it, you can do it with any ddebt
comp_sci_kid Wrote: ------------------------------------------------------- > i understand but the question is kinda stupid > though… LBO has nothing to do with it, you can > do it with any ddebt finally … the answer to my question? - sticky
Ok, there is a higher chance LBO will go under as their D/E is much higher after LBO then before LBO, that is the only logic explanation. Other then that you can prepackage with any ddebt IMHO