There are no banks that failed due to defaults from LBOs.
Besides, the plan goes well beyond banks. If a private investor wants to lend money for an LBO, this still prevents it.
Of course LBOs are not significant enough to single-handedly cause a bank to fail. However, they can still cause companies to go bankrupt that would have otherwise survived.
In any event, in a system where banks are not allowed to fail, I cannot see how they should be allowed to finance LBOs.
If a company's operations aren't profitable, it wouldn't have "otherwise survived". If it is profitable, then bankruptcy will wipe out debt and permit it to continue operations, hence it will continue to survive. It's the difference between Chapter 7 and Chapter 11.
>In any event, in a system where banks are not allowed to fail, I cannot see how they should be allowed to finance LBOs.
What work is LBO doing in this sentence? Financing LBOs carry some risk of loss, as does everything except Treasuries. Why would LBOs be special as something banks shouldn't be allowed to finance? Why are banks uniquely bad at risk analysis of LBO debt as opposed to, say, regular corporate debt, or junk bonds, etc?
Debt is wiped out after liquidation. Most companies do not survive this. Debt service can make the difference between profitability or unprofitability. Remember, this is debt that was forced on the company externally.
> Why are banks uniquely bad at risk analysis of LBO debt as opposed to, say, regular corporate debt, or junk bonds, etc?
I never said they are bad at risk analysis, I am saying they do not truly carry the risk in the first place. The difference is in the outcome. An LBO that should never have happened is worse than a corporate loan that should not exist.
Nope. I get the feeling you don't know the difference between chapter 7 and chapter 11?
>An LBO that should never have happened is worse than a corporate loan that should not exist.
Why?
Same here.
Chapter 11 doesn't "wipe out debt", that's what Chapter 7 does. Chapter 7 implies liquidation.
Chapter 11 may reduce debt obligations, entail partial liquidation, and so on. It doesn't just wipe out the debt.
> Why?
Because of the moral hazard. If I can just get a loan for an LBO to buy a company and squeeze it out like lemon, that's highly destructive. Unlike when issuing a junk bond, I have no real interest in the companies long-term survival. I guess you can make an argument that debt-financed stock buybacks have similar issues, but that's a topic for another day.
In the short term, even a bad LBO looks good for both the bank and the PE firm. Meanwhile, the company has a debt burden that paid for nothing but the privilege of having been bought out, likely requiring them to charge higher prices, which is a strong competitive disadvantage. This leads the whole argument of "restructuring companies to be more efficient" ad absurdum.
Also true, but a key feature of bankruptcy is discharge of debt. Liquidation is not required for elimination of debt.
https://scholarship.law.nd.edu/cgi/viewcontent.cgi?article=1...
What hasn't changed is the fact that Chapter 11 doesn't discharge debt. The prospect of having the creditors repaid at least in part is a prerequisite to Chapter 11.
Page six has around 22% converted and 10% still open. The rest were either dismissed or confirmed, and constitute a majority of cases.
"Still open" means the case is ongoing, so those numbers are irrelevant.
"Conversion" means going from Chapter 11 to Chapter 7 right away.
"Dismissal" doesn't mean success or failure, it means the case is dismissed.
"Confirmed" means that the case will proceed as Chapter 11 instead of being converted or dismissed outright. That can still lead to Chapter 7 later on if the restructuring fails.
Sure, any company, including those that successfully emerged from Chapter 11, may file for Chapter 7 later. But generally once it's confirmed it's considered a success.
Of course confirmation implies that the company continues to exist in order to for the restructuring to actually take place, it doesn't imply that it will exist afterwards. Dismissal doesn't imply that the company will continue to exist for much longer either, it's simply the alternative to going straight to Chapter 7. In any event, dismissal is not a success. You are also ignoring all the cases that go straight to Chapter 7 for your hamfisted construction of a "majority".
No matter how you twist and turn it, the majority of companies that file for bankruptcy do not survive, and the companies that do succeed in Chapter 11 still have to repay debt. That's my whole point.
https://repository.law.umich.edu/cgi/viewcontent.cgi?article...
1) Confirmation rates are actually higher than commonly believed (= roughly one third)
2) If we carefully select for companies that are likely to succeed with confirmation, success rates are higher. Well, duh.
There's a valid argument there, saying that the value of Chapter 11 should not be measured in terms of confirmation rates, because hopeless cases are hopeless no matter how good the law is.
Yet, this doesn't support your view that most companies that file for bankruptcy will survive. If anything, it shows the opposite.
People don't want to run businesses for ever. Private equity allows them to, in some cases. An unmotivated entrepreneur who is only doing a half assed job after a while will also cause a company to go bankrupt. Better to sell then.
Banks generally have sufficient collateral (i.e. from the acquired business) to cover the outstanding principal in the event of a bankruptcy.