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Disciplining Management or Guiding Management: Aligning Interests in Securitized Leveraged Buyouts
Author(s) -
Bouvier Laurent,
Nisar Tahir M.
Publication year - 2014
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22013
Subject(s) - leveraged buyout , business , leverage (statistics) , corporate governance , private equity , operationalization , debt , finance , accounting , industrial organization , computer science , philosophy , epistemology , machine learning
Leveraged buyouts (LBOs) are generally explained in terms of a governance mechanism that disciplines management. It is operationalized by increasing the leverage of a firm, which has an implicit consequence of constraining management in the use of free cash flows. However, under a relatively new form of LBO known as securitized leveraged buyouts, private equity firms raise funds on the back of the acquired company's operating assets. A securitized LBO imposes explicit restrictions on management with regard to its freedom for carrying out strategy decisions. Using the case study of Hertz, we show how a securitized LBO can be structured more efficiently and what important decisions must be made in order to improve its debt service capacity.