Question

How does a leveraged buyout work? What does the debt structure of the firm normally look like after a leveraged buyout? What might be done to reduce the debt?

Short answer

Leveraged buyout works through borrowing cash needed for repurchasing shares.

After the leveraged buyout, the company faces a heavy debt load, and management sells some assets to reduce such a burden.

Step-by-step solution

Leveraged buyout

Leveraged buyout refers to the acquisition of shares of the company by borrowing funds. Either the company’s management or other investor groups repurchase all shares of the company.

Impact on debt structure

The debt structure of a company after a leveraged buyout looks like substantially under heavy debts and interest expenses.

Reduction of debt

In the case of heavy debts, the company's management requires selling the assets to reduce the heavy load of debts and should restructure its capital through corporate restructuring.