That's not correct - creditors are usually banks for secured term debt or bondholders. The interest rates are not absurd. In this case, the bondholders are suing the private equity fund for stripping the asset. The bond in question looks like it had about a 10% interest rate

The lead bondholder is Marble Ridge Capital - a fund that specializes in distressed asset investing.

To be fair a 10% interest rate for debt sold in the last 2-3 years was kind of absurd, even for many junk bonds (of course I'm talking about the pre-virus situation).

10% would have been high over that timeframe but imagine what shape that business was in.

I assume someone must lend the money (as it's not created from nothing). How does it work?

Private equity firms raise funds (usually have a 10yr investment horizon) and use these funds to serve as the equity tranche for a buyout that the remainder is financed with debt. Banks (or other investment firms sometimes nowadays) will provide financing for these buyouts and that financing is later refinanced with syndicated financing through loans or bonds.

There are a decent amount of banks that were in the middle of this process, covid hit, and they are now stuck with those loans on their books.

in other words, yes, it is created "out of nothing" (when handing out the loans) and once the "unexpected bad things" happen it becomes "real" (as in it is on the books and will now have to be accounted for properly)?

I'm not a fan of private equity but I'm also not a fan of rants directed my way when I'm answering a question someone asked. Please take this somewhere else.

sorry if this came across as directed at you somehow. you seemed to have a more detailed understanding of the moving parts, so I figured I could throw a super simplified version of my understanding at you and see if it is a valid simplification or an invalid one. I'll interpret your answer as "invalid" for now. :)

No, it's not from thin air. Bridge financing is from cash on a bank's balance sheet (or as mentioned above, sometimes non-bank entities). Banks usually participate in bridge financing (some fees, loan on balance sheet typically on a short-term basis) because they want to also be part of syndicate financing (more fees, previous loan syndicated out to investors).

Banks infrequently get "hung" with loans and these usually are just bad deals that somehow got through. There are more hung loans now on deals that might have been okay under normal economic circumstances but are not feasible right now.

So will we bail out the banks and their shareholders this time?

If this question is in reference to the hung loans I mentioned in my previous post, there won't be a need to; at least on those. This is small portion of overall bank business and banks are in much better shape than over a decade ago.

So who actually loses money in the end?

Edit: Or is this one of the outliers and most of the other times all the participants make money?

Pension funds will be getting beat up by a lot of these.

For instance, 24 hour fitness is on the verge of failing, and it's owned by a pension fund in Canada.

https://www.24hourfitness.com/company/press_room/press_relea...

"24 Hour Fitness USA, Inc. announced that AEA Investors, a leader in the private equity industry; Ontario Teachers’ Pension Plan, Canada's largest single-profession pension plan – and one of the world’s largest; and Fitness Capital Partners, a fund organized by Dean Bradley Osborne and Global Leisure Partners have completed their acquisition of the Company from Forstmann Little & Co."

See my other comment below for Maplin explanation. It does appear that Lloyds bank lost money there.

How does a PE firm make money if a shell company of theirs is losing money while another arm of it makes money?

Also, if the only financing a business can access is basically consumer credit card rates, they probably weren't a going concern.

The Maplin explanation: http://www.coppolacomment.com/2018/03/the-sad-story-of-mapli...

> Further down the corporate structure, Maplin Electronics Group (Holdings) Ltd. mainly seems to exist to drain Maplin Electronics Ltd. of profits. On the books of Maplin Electronics Group (Holdings) Ltd. is an intercompany loan to Maplin Electronics Ltd. at an interest rate of 10%. The interest charge on this loan was sufficient to ensure that Maplin Electronics Ltd. made a statutory loss in both 2016 and 2017. Meanwhile, the direct owner of Maplin Electronics Ltd, Maplin Electronics (Holdings) Ltd., appears to exist only as a vehicle to hold a £31m revolving credit facility from Lloyds Bank. All of these intermediate companies are effectively guaranteed by MEL TopCo. All of them are now therefore insolvent.

> ... When Rutland Partners acquired Maplin in 2014 it funded the purchase with debt. That debt was loaded in its entirety on to the books of MEL Topco, in the form of £15m of bank loans at Libor + 7.5% and £72m of shareholders' loan notes at 15%.

None of those entities mentioned in there are creditors except Lloyds. Private equity deals sometimes have complex capital structures with absurd entity names but creating a "shell company" as described earlier doesn't allow you to get away with theft.

When I got a mortgage and refinanced. In both cases shortly after I got letter that my debt was purchased by someone else and from now on my payments supposed to go to a different company.

I suspect it is similar here. They make the loan then sell it to someone else.

That's very different than the Enron-esque transaction described above. You are describing two separate companies. They're saying that some "shell company" takes a loss while the parent company makes all the profit.