5 ms·

I'm a bit confused to why leveraging up companies this badly, without commercial need, isn't a violation of fiduciary duty of company leadership. I'm pretty su

I'm a bit confused to why leveraging up companies this badly, without commercial need, isn't a violation of fiduciary duty of company leadership. I'm pretty sure that it'd be in several countries, e.g. Germany. You might not get into trouble without a bankruptcy, but there were one, you'd likely be personally liable to some degree. EDIT: grammar

harryh 10y ago
Fiduciary duty to who? The banks making the loans?
- anarazel 10y ago
  Well, in Germany (I've had a business there before moving to the US, that's why I know some about it), you're free to milk "your" company, but if you end up going into bankruptcy you'll likely be hold at least partially liable to the money you took out of the company, even if it's some form of limited liability company. So essentially, yes, to the banks. Not if all works out, but in the cases it doesn't. To my knowledge that's largely not the case in the US atm.
  - harryh 10y ago
    Banks in the US are free to demand personal liability that goes beyond the company if they feel the risk demands it. Of course, it's a free market, so if some banks are willing to make the loan without doing that they'll probably win the business instead.
    - nommm-nommm 10y ago
      Banks readily issue small business credit cards backed by personal assets.
    - anarazel 10y ago
      That doesn't help previous creditors (including say employees, landlords, suppliers, etc), which now have to deal with a massively over-leveraged company, which is more likely to go out of business.
hendzen 10y ago
They are the owners of the company. The leverage is just a technique to move future cashflows in to the present so they can pay their investors and move on to the next company. Would it be better to just allow the company to go completely out of business?
- Retric 10y ago
  If the owners want to realize those future cash flows they can sell. Leverage unlike sale forces otherwise healthy companies into bankruptcy. The advantage is you can leverage more than the value of a company and then extract it without selling. PS: Remember you can profit from preforming a useful economic function, or fraud making profit a poor yardstick for anything else.
  - hendzen 10y ago
    If you truly believe this leverage will force the company in to bankruptcy, you should short Hostess stock (TWNK). It's currently trading at ~$12.50 per share. Furthermore, if you believe it is possible to save a distressed company like Hostess and generate superior returns without dividend recapitalization, perhaps you should start a competing private equity firm.
    - Retric 10y ago
      I am keeping an eye on them and considering put options. I am expecting a peak and crash within five years, but timing these things is risky.
      - msandford 10y ago
        The market can act irrationally longer than you can stay solvent. Put options are "safer" than shorting but they cost more.
  - lambertsimnel 10y ago
    While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening? Why would an otherwise healthy company be liquidated if it couldn't service its debt? Wouldn't lenders rather sell the company as a profitable going concern than accept what's left after liquidating it? A reasonable valuation for a genuinely healthy company would be greater than book value. I'm also confused about the practice of backs selling repossessed buy-to-let homes during a crash, evicting tenants in the process. Why sell low, rather than continue to collect the rent?

harryh 10y ago

Fiduciary duty to who? The banks making the loans?

anarazel 10y ago
Well, in Germany (I've had a business there before moving to the US, that's why I know some about it), you're free to milk "your" company, but if you end up going into bankruptcy you'll likely be hold at least partially liable to the money you took out of the company, even if it's some form of limited liability company. So essentially, yes, to the banks. Not if all works out, but in the cases it doesn't. To my knowledge that's largely not the case in the US atm.
- harryh 10y ago
  Banks in the US are free to demand personal liability that goes beyond the company if they feel the risk demands it. Of course, it's a free market, so if some banks are willing to make the loan without doing that they'll probably win the business instead.
  - nommm-nommm 10y ago
    Banks readily issue small business credit cards backed by personal assets.
  - anarazel 10y ago
    That doesn't help previous creditors (including say employees, landlords, suppliers, etc), which now have to deal with a massively over-leveraged company, which is more likely to go out of business.

hendzen 10y ago

They are the owners of the company. The leverage is just a technique to move future cashflows in to the present so they can pay their investors and move on to the next company. Would it be better to just allow the company to go completely out of business?

Retric 10y ago
If the owners want to realize those future cash flows they can sell. Leverage unlike sale forces otherwise healthy companies into bankruptcy. The advantage is you can leverage more than the value of a company and then extract it without selling. PS: Remember you can profit from preforming a useful economic function, or fraud making profit a poor yardstick for anything else.
- hendzen 10y ago
  If you truly believe this leverage will force the company in to bankruptcy, you should short Hostess stock (TWNK). It's currently trading at ~$12.50 per share. Furthermore, if you believe it is possible to save a distressed company like Hostess and generate superior returns without dividend recapitalization, perhaps you should start a competing private equity firm.
  - Retric 10y ago
    I am keeping an eye on them and considering put options. I am expecting a peak and crash within five years, but timing these things is risky.
    - msandford 10y ago
      The market can act irrationally longer than you can stay solvent. Put options are "safer" than shorting but they cost more.
- lambertsimnel 10y ago
  While I'm familiar with the idea that healthy companies can be so leveraged for quick profits that they go out of business, I don't understand the mechanism. Is the idea that such over-leveraged companies cease to be otherwise healthy before they go out of business? If so, why? Is the management worse while they are over-leveraged? Is it a matter of market conditions worsening? Why would an otherwise healthy company be liquidated if it couldn't service its debt? Wouldn't lenders rather sell the company as a profitable going concern than accept what's left after liquidating it? A reasonable valuation for a genuinely healthy company would be greater than book value. I'm also confused about the practice of backs selling repossessed buy-to-let homes during a crash, evicting tenants in the process. Why sell low, rather than continue to collect the rent?