Anatomy of a Leveraged Buyout - NYU Stern School of Business

Leverage and Control
The good: A firm that is restructuring to fix its operating problems is likely to
become healthier and be more likely to pay off its debt obligations. In practical
terms, the default risk in this firm decreases because of the possibility of
restructuring.
The bad: Firms that restructure are changing themselves on multiple
dimensions - business mix, cash flows and assets. Lenders who do not monitor
the process may very well find the assets that secure their loans eliminated
from under them and be left holding the bag. The equity investors who control
the busisiness can also direct cashflows into their own pockets (management
fees…)
Implication: Lenders in leveraged buyouts need to take an active role in the
restructuring process and should demand an equity stake in the business.
Aswath Damodaran 47