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.
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