Secured Creditor Recovery Rates from Management Buy-outs in Distress

Authors


  •  Financial support from Deloitte & Touche, Barclays Private Equity and Lloyds/TSB is gratefully acknowledged. The paper has benefited from comments of Eric de Bodt and other participants at the European Financial Management Association (EFMA) 2002 meeting in London. Thanks also to Ameziane Lasfer, Maria Carapeto, Steve Toms and participants at staff seminars at Nottingham University Business School and the Judge Institute, Cambridge, for comments on an earlier version.

Abstract

Buy-out literature suggests that secured creditors will recoup substantial proportions of the funds they extend to finance the initial buy-out. This paper uses a unique dataset of 42 failed MBOs to examine the extent of credit recovery by secured lenders under UK insolvency procedures and the factors that influence the extent of this recovery. On average, secured creditors recover 62 per cent of the amount owed. The percentage of secured credit recovered is increased where the distressed buy-out is sold as a going concern and where the principal reason for failure concerns managerial factors. The presence of a going concern qualification in the audit report and the size of the buy-out reduce the recovery rate by secured creditors.

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