David, why do such companies as you described need a takeover to give the debtors a haircut? One example in the story is a company that tries to do an IPO only 3 weeks after the takeover.
On Fri, Nov 03, 2006 at 11:27:19AM -0800, David B. Shemano wrote: > Michael Perelman writes: > > >> My intuition is in line with David's observation, but the Business Week > >> article > >> suggests that the funds are able to extract $$ before the companies > >> experience their > >> death throes. > > It is always easy to find an outrageous example, but I think this > misrepresents the reality on an overall basis. It is not uncommon for a > company to be balance sheet insolvent but have significant positive EBITDA > (earnings before interest, taxes, depreciation and amortization). Such > companies are targets for the private equity funds, because if the debt > holders can be convinced to take a "haircut", the company can then become > very profitable for the equity. The private equity funds have a lot of > expertise in buying debt and equities of an insolvent corporation to maximize > their leverage in a chapter 11 reorganization or out of court restructuring > in order to end up with a profitable EBITDA business shorn from debilitating > interest payments. > > It is extremely rare for a company to load up on debt simply in order to > distribute dividends. Among other reasons, if the transaction renders the > company insolvent, the transaction is treated as a "fraudulent transfer" and > the company (i.e., the bankruptcy trustee) can sue the recipients of the > dividends. That is not to say that such transactions do not occur, but it is > relatively rare. The private equity funds are more in the business of > getting their equity value through restructruing the existing indebtedness as > opposed to increasing the indebtedness. > > David Shemano -- Michael Perelman Economics Department California State University Chico, CA 95929 Tel. 530-898-5321 E-Mail michael at ecst.csuchico.edu michaelperelman.wordpress.com
