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> 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 c

> 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. 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.

ikeboy 7y ago
>Debt is wiped out after liquidation. 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?
- gridlockd 7y ago
  > I get the feeling you don't know the difference between chapter 7 and chapter 11? 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.
dragonwriter 7y ago
> Debt is wiped out after liquidation. Also true, but a key feature of bankruptcy is discharge of debt. Liquidation is not required for elimination of debt.
ikeboy 7y ago
Most companies who file for bankruptcy continue existing afterwards, just without the debt.
- gridlockd 7y ago
  Not true at all, the vast majority of Chapter 11 bankruptcies lead to Chapter 7 bankruptcies and ultimately cessation of business: https://scholarship.law.nd.edu/cgi/viewcontent.cgi?article=1995&context=ndlr https://scholarship.law.nd.edu/cgi/viewcontent.cgi?article=1...
  - ikeboy 7y ago
    The citation there is from 1989, pretty weak.
    - gridlockd 7y ago
      Feel free to look for contradictory numbers yourself, if you have reason to believe that Chapter 11 outcomes have somehow radically changed in the past years. 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.
      - ikeboy 7y ago
        https://www.justice.gov/sites/default/files/ust/legacy/2011/07/13/abi_200905.pdf https://www.justice.gov/sites/default/files/ust/legacy/2011/... Page six has around 22% converted and 10% still open. The rest were either dismissed or confirmed, and constitute a majority of cases.
        gridlockd 7y ago
        These numbers don't actually support you. "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.

ikeboy 7y ago

>Debt is wiped out after liquidation. 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?

gridlockd 7y ago
> I get the feeling you don't know the difference between chapter 7 and chapter 11? 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.

dragonwriter 7y ago

> Debt is wiped out after liquidation. Also true, but a key feature of bankruptcy is discharge of debt. Liquidation is not required for elimination of debt.

ikeboy 7y ago

Most companies who file for bankruptcy continue existing afterwards, just without the debt.

gridlockd 7y ago
Not true at all, the vast majority of Chapter 11 bankruptcies lead to Chapter 7 bankruptcies and ultimately cessation of business: https://scholarship.law.nd.edu/cgi/viewcontent.cgi?article=1995&context=ndlr https://scholarship.law.nd.edu/cgi/viewcontent.cgi?article=1...
- ikeboy 7y ago
  The citation there is from 1989, pretty weak.
  - gridlockd 7y ago
    Feel free to look for contradictory numbers yourself, if you have reason to believe that Chapter 11 outcomes have somehow radically changed in the past years. 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.
    - ikeboy 7y ago
      https://www.justice.gov/sites/default/files/ust/legacy/2011/07/13/abi_200905.pdf https://www.justice.gov/sites/default/files/ust/legacy/2011/... Page six has around 22% converted and 10% still open. The rest were either dismissed or confirmed, and constitute a majority of cases.
      - gridlockd 7y ago
        These numbers don't actually support you. "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.