LBOs Don’t Diminish Investor Recoveries, Moody’s Report Says

Leveraged buyouts haven’t led to lower lender recoveries in the event of default compared with non-buyout debt, according to Moody’s Investors Service.

In a review of about 200 LBO defaults starting in 1988, the average so-called family-recovery rate of 54 percent is almost identical to the 55 percent for the more than 800 non-LBO defaults, according to the report published yesterday.

“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 average rate at defaulted companies that had not experienced an LBO,” David Keisman, senior vice president at Moody’s, wrote in the report.

LBOs accounted for about half of the defaults between Jan. 31, 2009 and Aug. 31, 2010, and about half of the companies rated B3 negative or lower. The LBOs had an average of $871 million of defaulted debt, Keisman wrote, citing data from Moody’s Ultimate Recovery Database, which tracks recovery rates for more than 1,000 defaults starting in 1988.

The buyout companies defaulted through distressed-debt exchanges and pre-packaged bankruptcies more often than non-LBO defaults, Keisman wrote in the report. These types of defaults typically lead to higher investor recoveries than a regular bankruptcy or liquidation. Less than half of LBO defaults in Moody’s database occurred through a typical bankruptcy filing, compared with almost two-thirds of non-LBO defaults.

Distressed Exchange

In the last default cycle, between Jan. 31, 2009 and August 31, 2010, LBO debt using a distressed-debt exchange had a 75.9 percent recovery, compared with 49.6 percent for pre-packaged bankruptcy and 48.7 percent for a regular bankruptcy, Keisman wrote.

While family recoveries, the weighted average of the recoveries for all of the individual debt pieces, are almost equal in the two groups, the bank debt in the buyout defaults recovered less because it had a smaller cushion of subordinated debt. Without the implementation of a distressed exchange, where bank debt usually has a 100 percent recovery, loans would have had lower recoveries.

“Sponsors use more bank debt than non-LBOs,” Keisman said in a telephone interview. “Bank debt tends to recover at a higher rate than unsecured bonds, but the more that bank debt is a percentage of the deal, it recovers less because the debt cushion is less.”

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