Bankruptcy Auctions: The New Buyout Market?
What is a private equity firm to do in the current leverage constrained market? The days of bidding up the prices of profitable and growing businesses in robust auctions -- fueled by stapled financing featuring PIK/toggle covenant light terms at 7x EBITDA -- are a thing of the past. The debt crisis has largely eliminated the availability of debt financing for LBO transactions, and owners of healthy businesses are holding their properties off the market rather than attempting to gain liquidity against the headwinds of wounded private equity buyers and introspective lenders. Obviously, many private equity professionals are devoting a significant amount of their time and energy nursing the hangovers in their own portfolios from many of these deals. But for the more intrepid PE professionals with dry powder, there may be an opportunity to pick through the carnage created by the debt bubble of the early part of this century and turn some of the lemons into lemonade. The auction process in this new world order may be in the form of sales pursuant to Section 363 of the Federal Bankruptcy Code.
