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It's not just lending to PE firms but to the original businesses before they get bought. Say Basecamp gets a ~ small 100m loan from syndicate. Basecamp is quit

It's not just lending to PE firms but to the original businesses before they get bought. Say Basecamp gets a ~ small 100m loan from syndicate. Basecamp is quite healthy, well managed, low leveraged, so they secure 4% rate for 5yrs, without many covenants. Then PE buys Basecamp, leverages it to the sky and beyond, Basecamp sells, and suddenly the original 100m loan is now junk-grade. The original lenders never interacted with the PE firm, but they still got screwed. Could they have prevented it? Sure, with lots of covenants, but they have lots of added costs for all parties and often have ways around them. Which means every possible firm that might get bought by PE is now a) having to deal with lots of covenants, and b) paying 6-7% instead of the 5% they would get if the likelihood of PE acquisitions was lower.

travisoneill1 7y ago
When a company is recapitalized in a PE buy the existing lenders need to either be paid back in full or explicitly approve of having their debt rolled over into the new structure. They can't be forced.
- zzleeper 7y ago
  You don't need to change the structure. Change management, new management raises all the new debt. Unless there is a bullet proof leverage covenant, then the existing lenders can't do zip about that. Thus, their only option is to go to the table and "accept" the new structure.
  - travisoneill1 7y ago
    This is not a leverage covenant. This is a change in control provision, which there always is for any type of senior debt.
  - valuearb 7y ago
    You are exactly like the author. You don't understand enough to make the conclusions you make. Lenders aren't stupid in general. They have covenants to protect themselves. In the case of Basecamp, which likely has almost zero physical assets, any loan is going to be very contingent on protecting the levels of profitability necessary to repay it. Whoever owns Basecamp won't be able to get a credit card in it's name without lender approval. Source: I spent the last year working for a firm that is funded by venture capital loans. Every other loan & credit line had to be made subordinate to theirs, and we could not borrow anything new without their approval. It wouldn't matter who we sold the business to, they'd have to agree to the same restrictions or no sale.
- LatteLazy 7y ago
  Is that true of creditors? I didnt think creditors had a right to object to a change in ownership...
  - valuearb 7y ago
    It depends upon the loan and it's negotiated. If you start a chain of ice cream parlors and borrow millions to buy and build your stores, likely that loan is secured only by the store properties themselves. If it's a general business loan with no physical assets to secure it, you can bet your bippy they'll demand covenants restricting how much other debt you can have and that those covenants survive change of control.
Lazare 7y ago
That's a good story. Does it actually happen? Nothing in the tweet thread talked about this scenario, and I'm not aware offhand of examples of this, and I rather suspect it wouldn't work in practice. You say "not a lot of covenants", but change in control covenants are pretty standard, and would be triggered in the simple form of your example. As you note, there's often a way around these things but without examples, this feels awfully tenuous.

travisoneill1 7y ago

When a company is recapitalized in a PE buy the existing lenders need to either be paid back in full or explicitly approve of having their debt rolled over into the new structure. They can't be forced.

zzleeper 7y ago
You don't need to change the structure. Change management, new management raises all the new debt. Unless there is a bullet proof leverage covenant, then the existing lenders can't do zip about that. Thus, their only option is to go to the table and "accept" the new structure.
- travisoneill1 7y ago
  This is not a leverage covenant. This is a change in control provision, which there always is for any type of senior debt.
- valuearb 7y ago
  You are exactly like the author. You don't understand enough to make the conclusions you make. Lenders aren't stupid in general. They have covenants to protect themselves. In the case of Basecamp, which likely has almost zero physical assets, any loan is going to be very contingent on protecting the levels of profitability necessary to repay it. Whoever owns Basecamp won't be able to get a credit card in it's name without lender approval. Source: I spent the last year working for a firm that is funded by venture capital loans. Every other loan & credit line had to be made subordinate to theirs, and we could not borrow anything new without their approval. It wouldn't matter who we sold the business to, they'd have to agree to the same restrictions or no sale.
LatteLazy 7y ago
Is that true of creditors? I didnt think creditors had a right to object to a change in ownership...
- valuearb 7y ago
  It depends upon the loan and it's negotiated. If you start a chain of ice cream parlors and borrow millions to buy and build your stores, likely that loan is secured only by the store properties themselves. If it's a general business loan with no physical assets to secure it, you can bet your bippy they'll demand covenants restricting how much other debt you can have and that those covenants survive change of control.

Lazare 7y ago

That's a good story. Does it actually happen? Nothing in the tweet thread talked about this scenario, and I'm not aware offhand of examples of this, and I rather suspect it wouldn't work in practice. You say "not a lot of covenants", but change in control covenants are pretty standard, and would be triggered in the simple form of your example. As you note, there's often a way around these things but without examples, this feels awfully tenuous.