Re:Neiman Marcus files for bankruptcy
by jariel on Thursday May 07, 2020 @02:51PM
(#23106709)
One of the tactics of a PE company is to effectively buy a company by securitizing its future revenues in the form of debt which is called a 'leveraged buy out'.
Basically a fund will invest a small amount and convince a bank to give them the money for the rest of the acquisition, which will then be in the form of debt to the company, using the revenue stream and assets of the company as collateral.
The banks get a nice loan out there and the PE firm gets full ownership with a lot of leveraged help from the bank.
There are possibly a bunch of structural benefits such as tax optimization, ie interest payments are tax-deductible etc..
It's viewed negatively because it's generally a form of financial engineering re-arranging deck chairs, not really value-creating, although it is for investors.
A company with a lot of debt can be more exposed and more likely to fail in a downturn.
Basically a fund will invest a small amount and convince a bank to give them the money for the rest of the acquisition, which will then be in the form of debt to the company, using the revenue stream and assets of the company as collateral.
The banks get a nice loan out there and the PE firm gets full ownership with a lot of leveraged help from the bank.
There are possibly a bunch of structural benefits such as tax optimization, ie interest payments are tax-deductible etc..
It's viewed negatively because it's generally a form of financial engineering re-arranging deck chairs, not really value-creating, although it is for investors.
A company with a lot of debt can be more exposed and more likely to fail in a downturn.
See: Leveraged Buy Out.