Private Equity and the Resolution of Financial Distress
Stockholm School of Economics; University of Chicago - Booth School of Business; Centre for Economic Policy Research (CEPR); National Bureau of Economic Research (NBER); Stockholm School of Economics - Department of Finance
Edith S. Hotchkiss
Boston College - Carroll School of Management
David C. Smith
University of Virginia - McIntire School of Commerce
April 7, 2011
AFA 2012 Chicago Meetings Paper
ECGI - Finance Working Paper No. 331/2012
In order to understand the role of private equity firms in the restructuring of financially distressed firms, we examine the private equity ownership of 2,156 firms which obtained leveraged loan financing between 1997 and 2010. The economic downturn beginning in 2007 is associated with a marked increase in defaults of these highly leveraged companies; approximately 50% of defaults involve PE-backed companies. However, PE-backed firms are no more likely to default during this period than other firms with similar leverage characteristics. But defaulting firms that are private equity backed spend less time in financial distress and are more likely to survive as an independent reorganized company versus being sold to a strategic buyer or liquidated. The ability to restructure more efficiently seems to be affected by the PE sponsor's financial as well as reputational capital. In contrast, recovery rates to junior creditors are lower for PE-backed firms.
Number of Pages in PDF File: 45
Keywords: Financial Distress, Bankruptcy, Private Equity, Capital Structure
JEL Classification: G24, G33, G32working papers series
Date posted: March 21, 2011 ; Last revised: March 21, 2012
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