bust outs

As Balloon Juice says, a classic bust out, as originally described in Goodfellas:

These private investors were able to buy companies like Simmons with borrowed money and put down relatively little of their own cash. Then, not long after, they often borrowed even more money, using the company’s assets as collateral — just like home buyers who took out home equity loans on top of their first mortgages.

For the financiers, the rewards were enormous. Twice after buying Simmons, THL borrowed more. It used $375 million of that money to pay itself a dividend, thus recouping all of the cash it put down, and then some.

A result: THL was guaranteed a profit regardless of how Simmons performed.

The reason I think it’s relevant here is that I suspect the same racket is going to be run on Premier League clubs sooner or later, especially the ones which fail to get into the magic circle at the top.

Semi-relevantly, it’s probably worth exploring what positions the hedge funds backing the Tories are taking on various aspects of the British economy over the next few years, though that’s a task beyond me.

Comments

[Richard J]

it’s probably worth exploring what positions the hedge funds backing the Tories are taking on various aspects of the British economy over the next few years

Cynically speaking, 'don't you dare touch the 18% rate on capital gains'.

[Richard J]

The reason I think it’s relevant here is that I suspect the same racket is going to be run on Premier League clubs sooner or later

Oh, and BTW, what, you think it's not already?

[jamie]

Not right now: i think the first wave of owners of big premiership clubs were genuinely placing themselves for income from global media rights, the dodginess of leveraged buyouts aside.

[Chris Williams]

Next question: "Global finance capital after 1990 was distinguishable from a very large 'long firm fraud' in how many, if any, respects?"

[Richard J]

Less knee-cappings.

[Richard J]

i think the first wave of owners of big premiership clubs were genuinely placing themselves for income from global media rights, the dodginess of leveraged buyouts aside.

Less facetiously, the thing is though, if you read the article, the last PE owners and the debt issuers were hoping for the same sort of thing - that the new mattress line would be a success and generate cash flow enough to pay the debt - after all, bankers aren't complete idiots (the modfying adjective here is important) and do hope that somebody ends up paying them back. Leveraging up to pay out dividends to the equity owners is surprisingly common in privately-held companies; the risk should be apparent from the article.

[jamie]

Well the bankers wanted the money back; the owners wanted to get paid, which they could just as well by flipping the copmpany on to greater fools or by loading debt on to it, for which they needed a sound product.

[Richard J]

which they could just as well by flipping the copmpany on to greater fools or by loading debt on to it, for which they needed a sound product.

The exit strategy for most investment funds there in a nutshell. You've bought something worth 100, hopefully, it's now worth 150, and you've got investors wanting you to give them the 50 gain in cold hard cash(less your hefty cut for your l33t 1|\|vstmnt strategy) - taking out more loans is a reasonably legitimate [1] way of doing this, but staying in for the long run of future gains.

[1] Reasonable in the context of the current paradigm, of course.

[Alex]

As far as I can see, most of the supposed "billionaire" club owners are highly leveraged buy outs. There have been only three cases of teh billionaire "investing in the club" - Chelsea/Abramovich, Blackburn Rovers/Jack Walker, Wolves/Jack Hayward.

(Does anyone see a remarkably poor strike rate?)

Liverpool - borrowed £500 million to buy the club, paying it back from the club's cashflow, classic lbo. Aston Villa - similar. Manchester United - much the same.

Man City (Shinawatra period) - perhaps the first no-money down LBO in business history.

Portsmouth FC is the risible, baroque accidental satire of this phenomenon.

[john b]

I don't understand the antipathy towards LBOs.

If a company has an enterprise value of £1bn, it doesn't make a blind bit of different to what the company does whether that consists of £200m attributable to shareholders and £800m attributable to bondholders, or whether the whole £1bn is attributable to shareholders.

Either way, some capitalists have invested a billion quid in a company because they think they'll get a return. So either that's a bad thing, in which case fine but it's got nowt to do with LBOs, or it's a good thing, in which case likewise.

[Cian O-Connor]

No money has been invested in the company, its simply that money has been exchanged for ownership rights. This isn't pedantry, its an important point that gets forgotten 99% of the time.

The main objection is that LBOs normally destabilise good companies by overloading them with debt payments, while enriching the new "owners" for doing absolutely fuck all (or at worst limiting their downside). Its essentially a legal way of skimming the books.

Its bad for the larger economy and employees. It also tends to result in the worst kind of short term asset stripping (and is part of the reason why the UK's industrial sector is in such poor shape). So for example, several of the media companies in the US have gone under due to debt obligations incurred under LBOs; without those they'd have been fine.

[Cian O-Connor]

"bankers aren't complete idiots"

History suggests that in booms/bubbles the modifying adjective disappears.

[Chris Williams]

_Fewer_ knee-capping_s_

Less knee-_capping_

get it together, Richard.

[Richard J]

A knee-capping is a discrete act, no? Fewer knee-cappings sounds right to me. (Let's see if we can find a Provo/UVF'er to check on the fine details.)

[dsquared]

I am not a fan of "cappings". "Fewer knees-capping" surely.

[john b]

@Cian - but if a (non-financial-services) company 'goes under' because it's making an operating profit but can't cover debt payments, that doesn't matter at all: the administrators simply sell the enterprise as a going concern and pay off the creditors at whatever % of their debt can be recovered.

[Cian O-Connor]

They might emerge from bankruptcy, though its by no means a given. You can lose a lot of customers during the bankruptcy process, and in fast moving industries it can be fatal as you're left behind. The period preceding bankruptcy for LBO companies tends to involve savage cost cutting and underinvestment as well.

Basically the data on LBO's suggests that it results in companies that at best under perform, and at worst go out of business. However banks and (so called) VCs do very nicely out of them, which is why they're so popular.

Its a major part of the reason for the disastrous decline of newspapers in the US, incidentally.

[ajay]

Cian's right. See also M&A, which famously destroys shareholder value in 80% of cases but creates investment banker value in 100% of cases.

[john b]

Basically the data on LBO's suggests that it results in companies that at best under perform, and at worst go out of business.

Show data. In its absence, this is just 'oooh, we're complacent managers, we want protected from these nasty VCs and PEs who might actually hold us to account and make us do some real work' bullshit.

[Phil]

Or possibly "we're ordinary wage-earners who find our current conditions of employment quite difficult enough already and can't see why our managers should be being given extra reasons to yell about increasing efficiency and productivity (i.e. more work for less pay)".

[ejh]

"bankers aren't complete idiots"

History suggests that in booms/bubbles the modifying adjective disappears.

And in bars.

[Richard J]

And in bars.

Humanity, sad to say, is rarely at its best in bars.

[Cian]

John B:
Thank you for repeating pretty much verbatim the propaganda from VCs/the city from the last 25 years. Its all about the laziness. The city knows best.

I'm basing this upon the economics research I've read on the topic, though to be honest looking at the accounts of your average LBO is all you really need to do. Given I don't have time to dig out any actual papers for you, feel free to discount this as fact free ranting if you so wish.