Читать книгу Leveraged Buyouts - David Pilger - Страница 12

For all of its advantages, leverage comes with risk. While it is possible to breakdown the various advantages of leverage into different descriptions the risk of leverage is singular in nature. The risk of leverage is greater default risk.

When times are good and a company is producing earnings to pay its suppliers, employees and officers, leverage is a beautiful thing. However, in times of trouble, when the company is not generating profits, leverage can be a death blow that does not allow a company to get itself back on its feet. Even in times of trouble, interest payments are still required on top of the regular operating expenses that come with operating a company.

“For all of its advantages, leverage comes with risk. The risk of leverage is greater default risk.”

The creditors have prepared for the day of failure since before the original credit agreements were signed. In the case of a failing business (or bankruptcy), the creditors stand in line ahead of the equity partners to get their money back. Only after all the creditors get their money back is there any chance of equity investors recouping their investment capital and usually by that time there is nothing left to recoup.

If a company were to not have any debt, but were to fall on tough financial times, the outcome would be somewhat different. The biggest difference would be that there would be less chance of bankruptcy. (We are presuming that there are no unsecured creditors like employees or vendors that have supplied goods or services without being paid.) The company could sell any assets it has on its balance sheet. From the proceeds of the asset sale, the equity partners of the company could keep all the money and help stave off bankruptcy.

Leverage comes with the risk not being able to meet the interest expense obligation. In good times, leverage seems like a wonderful idea. It allows a company to get the most out of the assets on its balance sheet and assists the growth of the company. However, in bad times, the interest burden can weigh on the company so greatly that it becomes a weight around the company’s proverbial neck and sinks the company in an ocean of debt.