I'm constantly shocked that "leveraged buyouts" are a thing. It seems like taking a business and loading it up with debt is a recipe for failure that would introduce a lot of risk for the lender, but banks and other capital holders continue issuing the debt.
I cannot fathom it either. First I heard that it was a thing was when the Glazers borrowed money to buy Manchester United then saddled them with half of the debt. They had no debt prior to being purchased. I don't know how common it is, but it feels like you're telegraphing that you're going to use the organization you bought as a piggy bank or a plaything. Like, see this shit (from https://en.wikipedia.org/wiki/Glazer_ownership_of_Manchester...)
From 2016, the Glazers paid themselves annual dividends from the club, at over
£20 million every year from 2016 to 2020. In that same period, the club's debt
repayments "all but ceased", described The Daily Telegraph, while interest
payments continued. While paying dividends was common in business,
Manchester United were the sole Premier League club to "pay regular
dividends of any kind", reported The Daily Telegraph in May 2021
I don't even like Man Utd, but that's shady as hell
> constantly shocked that "leveraged buyouts" are a thing
LBOs were a cure to the poison of the post-war conglomerate [1]. Those were run as personal fiefdoms by aloof executives and their cronies.
The traditional check was M&A. Conglomerates having no clean competitors, this–in practice–meant a buyer putting up cash and borrowing the rest, buying the company, taking out a loan in the company's name, using that to pay themselves and then paying back the personal loan. The only purpose the buyer's credit served was to gatekeep. LBOs compress that process, letting anyone challenge management if they can convince investors/lenders to back their vision.
I'm guessing you hear a lot more about the failures/impending failures in LBO financing than you do the successes/non-defaults. You could calculate the implied probability of default from the POV of the lender by comparing the financing terms to "assumed risk free" treasuries, and then compare that with the historical data to see how accurate they are at pricing that risk. If you'd rather not do that work, I'm sure there's plenty of papers in the academic literature examining that exact question.
They have a place and can be used effectively to solve actual problems. Old line businesses with too many units and complicated business arrangements can actually benefit from being torn apart and rebuilt effectively.
The problem is, when the Fed gives out exceptionally cheap interest, it makes it incredibly easy to apply this strategy even when the underlying business would not benefit from it.
It's not intended for the business to continue operating after a leveraged buyout. Leveraged buyouts are typically used where the company has assets that aren't "productive" or is made up of more-or-less independent units that are worth more separate than together.
In these cases, cutting expenses by firing people is usually the first step, since the business' revenue stream can usually continue on autopilot for a while.
I expect Twitter to report record-breaking profits next quarter and Twitter's share price to go up accordingly. Maybe even enough to fill in some of Musk's hole.
Because they expect that debt to be inflated away as the currency its denominated in goes to zero (and they know they'll get replenished with cash when they need it via the Fed [1][2]).
