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Because you borrow money as a new company called NewCo formed offshore and then you buy the old company with a loan tied to the assets and performance of old co
by caseyf7 11y ago
Because you borrow money as a new company called NewCo formed offshore and then you buy the old company with a loan tied to the assets and performance of old company. This loan is also contingent on NewCo completing the acquisition of old company. Ideally you give no personal guarantees so the bank only collects assets of old company if it fails and you walk away with your fees and dividends that you've received since then.
- psykovsky 11y agoDoesn't seem like a good deal for the banks. And bankers aren't the ones to let themselves be fooled like that. Something's fishy.
- charlesdm 11y agoThis depends. There are certain types of debt with different risk levels. The debt with the lowest levels of interest tends to be traditional bank debt. If the company goes under, they are first in line to recover any losses. The more debt involved in a deal, the riskier it gets. If you fund a $100m deal with $40m in debt, and $60m in equity, that's fine. That's usually low risk if it's a healthy company. Now imagine the same deal, $80m debt and $20m in equity. Traditional banks might only give you a loan for $50m. The remaining $30m you will need to get from other investors, who will be further in line to recover any losses (meaning they will charge a higher rate of interest). Why do banks love big deals? Easy: these deals generate a lot of profit. On a $100m loan, they'll be making $4-6m a year. Usually the risk level is acceptable for them, since they're first in line when the company gets liquidated.