Leveraged Buyouts and Financial Distress

Ayash, Brian; Rastad, Mahdi

doi:10.2139/ssrn.3423290

Cited by 9 publications

(4 citation statements)

References 10 publications

Supporting

Mentioning

Contrasting

Order By: Relevance

“…Holding large debt loads, particularly during periods of economic contraction, can place additional financial stress on OPEGs to service interest payments and can put practices at risk for cost-cutting, restructuring, or even bankruptcy. 5 The inherently distorted incentive structure in debt acquisition and payoff between practices and a PE firm often creates conflicts in practice management strategy. Factors that have been cited include loss of autonomy, decreased influence on practice culture, increased scope of midlevel practitioners, reduced yearly compensation, and elimination of the right to due process during termination of employment.…”

Section: Discussionmentioning

confidence: 99%

“…PE buyouts often involve raising substantial amounts of debt, often 70 to 80 percent of the purchase price, to meet the cost of acquisition. 5 Debt financing allows PE firms to commit very little of their own capital (~2% of purchase price) and achieve high internal rates of return (~20%) in order to resell the company at a profit. 1 However, this debt is carried by the practice, which shoulders the burden of repayment post-acquisition.…”

Section: Introductionmentioning

confidence: 99%

See 1 more Smart Citation

Financial Health of Private Equity-Backed Ophthalmology and Optometry Groups: an Analysis of Debt Valuations

Desai

Memon

Chen

et al. 2022

Preprint

View full text Add to dashboard Cite

Purpose: To identify debt valuations of ophthalmology and optometry private equity –backed group (OPEG) practices, which are a proxy for financial performance. Design: Retrospective cohort study using the 2021 Business Development Company (BDC) Report and BDC quarterly/annual filings. Participants: BDCs holding one or more ophthalmology/optometry group debt instruments. Methods: The 2021 BDC Report was used to identify all BDCs actively filing annual reports (Form 10-Ks) and quarterly reports (Form 10–Qs) in 2021. The public filings of BDCs lending to OPEGs were searched from inception of a debt instrument in a BDC portfolio, and the amortized cost and fair value of each debt instrument were tabulated. A panel linear regression was used to evaluate temporal changes in debt valuations. Main Outcome Measures: Trends in total debt held by OPEGs, trends in valuation (premium or discount) of OPEGs. Results: A total of 2997 practice locations affiliated with 14 unique OPEGs and 17 BDCs were identified in 2021. Debt valuations of OPEGs decreased 0.46% per quarter over the study period (95% CI: –0.88 to –0.03, P = 0.036). In the COVID-19 pre-vaccine period (March 2020 – December 2020), there was an excess (additional) 4.93% decrease in debt valuations (95% CI: –8.63 to [ndash]1.24, P = 0.010) when compared to prepandemic debt valuations (March 2017 – December 2019). Effects of COVID–19 on valuations stabilized during the pandemic post-vaccine period (February 2021 – March 2022), with no change in excess debt valuation compared to pre-pandemic baseline (0.60, 95% CI: –4.59 to 5.78, P = 0.822). There was an increase in practices that reported average discounted debt valuations from 20 practices (1.6%) associated with 1 OPEG to 1213 practices (40.5%) (including 100% of newly acquired practices) associated with 9 OPEGs, despite stabilization of COVID–19 related excess (additional) debt. Conclusions: Valuations of OPEG debt have declined significantly post–PE investment from March 2017 to March 2022. An excess (additional) decline in valuations was observed during the COVID pre –vaccine period, with trends in excess debt valuations returning to baseline pre –pandemic levels by December 2021. Declining and discounted valuations of debt raise concerns about the financial viability of many PE–backed practices.

show abstract

Section: Discussionmentioning

confidence: 99%

Section: Introductionmentioning

confidence: 99%

Financial Health of Private Equity-Backed Ophthalmology and Optometry Groups: an Analysis of Debt Valuations

Desai

Memon

Chen

et al. 2022

Preprint

View full text Add to dashboard Cite

show abstract

“…67 The unfortunate by-product of these strategies is that the core operating business must meet substantial ongoing interest, rental, and management fees, thus reducing their financial flexibility 74 and increasing the risk of insolvency. 75 According to the Centre for Health and the Public Interest, as much as 16% of the weekly fee for a residential bed goes towards interest payments on company debt within the UK's largest financialised care home chains. 71 These kinds of practices demonstrate a prioritisation of profit over quality of care, with the costs and risks of heavily financialised corporate group structures arguably being shifted from investors onto workers and service users through low wages, poor working conditions, high prices, and cuts to services.…”

Section: Profit Motivementioning

confidence: 99%

A critique of the marketisation of long-term residential and nursing home care

Walker

Druckman

Jackson

2022

The Lancet Healthy Longevity

View full text Add to dashboard Cite

“…Thus, earnings-decreasing behavior may be selected by the new management following management change (turnover) as part of a wide strategy to blame the "old" management for the distressed firm condition and as a signal of their willingness to cope with the financial problems (Ghazali et al, 2015;DeAngelo et al, 1994). Second, earnings-decreasing behavior may be selected by existing managers acting in selfinterest to reduce the market price temporarily to increase their own gains from a subsequent management buyout (Ayash & Rastad, 2021;Perry & Williams, 1994).…”

Section: Literature Reviewmentioning

confidence: 99%

Accounting Manipulation of Financially Distressed Firms: Malaysian Evidence

Nia¹,

Ghazali

Shafie

et al. 2022

MJSSH

View full text Add to dashboard Cite

Firms approaching deterioration in financial performance may make income-increasing accounting choices in an attempt to survive what is probably deemed by the management as a temporary bad period. This study attempts to empirically examine real activities-based earnings manipulation among financially troubled firms in Malaysia over the years prior and after being officially designated as a “financially distressed firm.” The study detects real activities manipulation by investigating patterns in cash flow from operations (CFO), discretionary expenses, and production costs. Results reveal that CFO and discretionary expenses are unusually low for the years preceding the official designation as a financially distressed firm. This evidence suggests that distressed firms temporarily increase sales and reduce discretionary expenditures to improve reported margins. Moreover, having likely exhausted the opportunities for accounting manipulation, distressed firms manipulate real activities, such as sales and discretionary expenditures, highly aggressively in the years after being identified as a financially distressed firm. This study contributes to literature by going beyond the examination of abnormal accruals derived from accruals models to gain insight into the measurement of operational elements of income rather than the implementation effects of the accounting system.

show abstract

Leveraged Buyouts and Financial Distress

Cited by 9 publications

References 10 publications

Financial Health of Private Equity-Backed Ophthalmology and Optometry Groups: an Analysis of Debt Valuations

Financial Health of Private Equity-Backed Ophthalmology and Optometry Groups: an Analysis of Debt Valuations

A critique of the marketisation of long-term residential and nursing home care

Accounting Manipulation of Financially Distressed Firms: Malaysian Evidence

Contact Info

Product

Resources

About