by Gleb Lerman, The Affordable Oracle
This past weekend in my entrepreneurship class we were discussing LBO (leveraged buyout) deals gone bad. LBO’s go bad either due to initial overpayment or an unexpected change in the competitive landscape.Â Resolution to bad LBO deals follow one of two options: liquidation, or a prolonged holding periods where the LBO sponsor holds the company for a period substantially longer than initially expected, in other words, trying to grow the company out of its debt.
Analogizing bad LBOs to bad real estate deals I brought up the questions of whether LBO sponsors can buy back the debt at a fraction of the principal amount like many real estate sponsors are now doing.Â Many debt buy backs are so attractive that they actually help the sponsor salvage the initial equity investment. There are numerous reasons cited for why loan buy back by the sponsor seldom occurs in LBO deals.
One explanation for why discounted debt sales to the sponsor occur in real estate and not LBOs is that LBO loans are often syndicated across many banks and a successful debt sale requires agreement by a majority or in some cases all of the syndicate banks.
Well guess what?…many real estate loans have been syndicated and as a result sponsors looking to buy back the debt on their projects are having a tough time negotiating with their lender(s).Â Luckily, in some cases the appraiser is chosen as the mediating voice of reason in helping to complete these multi-party negotiations.
Some interesting observations from our side of the business has been that an appraisal prepared the lead bank often results in questions from 3-5 other participating banks.Â I guess it’s good news is that bankers are starting to read the appraisals now.