Editing Leveraged buyout (section)

===Failures===
As with all companies, a proportion of companies acquired in leveraged buyouts will experience financial challenges and given the higher [[debt-to-equity ratio]] of LBO targets, these financial challenges can result in default.

Especially in the leveraged buyouts of the 1980s in which debt-to-equity ratios often exceeded 9 to 1, defaults occurred at notable levels.  [[Robert Campeau]]'s 1988 buyout of [[Federated Department Stores]] and the 1986 buyout of the [[Revco]] drug stores were well documented failures that resulted in bankruptcy. The failure of the Federated buyout was a result of excessive debt financing, comprising about 97% of the total consideration, which led to large interest payments that exceeded the company's operating cash flow.  Many LBOs of the boom period 2005–2007 were also financed with too high a debt burden, however default rates were significantly below the expectations of market observers given the proximate onset of the [[2008 financial crisis]].<ref name=Morningstar>{{cite web |author=Morningstar |date= |title=Understanding Debt-to-Equity Ratios in LBOs |url=https://www.morningstar.com/articles/ |website=Morningstar |publisher=Morningstar |access-date=}}</ref><ref name=Moodys>{{cite web |author=Moody’s |date= |title=The Impact of Lower Debt-to-Equity Ratios on LBO Stability |url=https://www.moodys.com/ |website=Moody’s |publisher=Moody’s Investors Service |access-date=}}</ref>
 
The inability to repay debt in an LBO can be caused by initial overpricing of the target firm and/or its assets. Over-optimistic forecasts of the revenues of the target company may also lead to [[financial distress]] after acquisition. Some courts have found that in certain situations, LBO debt constitutes a [[fraudulent conveyance|fraudulent transfer]] under U.S. insolvency law if it is determined to be the cause of the acquired firm's failure.<ref>U.S. Bankruptcy Code, 11 U.S.C. § 548(2); Uniform Fraudulent Transfer Act, § 4. The justification given for this verdict is that the company gets no benefit from the transaction but incurs the debt for it nevertheless.</ref>  The outcome of litigation attacking a leveraged buyout as a fraudulent transfer will generally turn on the financial condition of the target at the time of the transaction – that is, whether the risk of failure was substantial and known at the time of the LBO, or whether subsequent unforeseeable events led to the failure. The analysis historically depended on "dueling" expert witnesses and was notoriously subjective and it was rare that such findings were sustained.<ref name="Amicus">{{cite journal|ssrn=1632084 |title=Amicus Brief, In re Lyondell Chemical Company bankruptcy |date=29 August 2010 |journal=Ssrn.com |last1=Simkovic |first1=Michael }}</ref>  In addition, the [[Bankruptcy in the United States|Bankruptcy Code]] includes a so-called "safe harbor" provision, preventing bankruptcy trustees from recovering settlement payments to the bought-out shareholders.<ref>U.S. Bankruptcy Code, 11 U.S.C. § 546(e).</ref> In 2009, the [[U.S. Court of Appeals for the Sixth Circuit]] held that such settlement payments could not be avoided, irrespective of whether they occurred in an LBO of a public or private company.<ref>QSI Holdings, Inc. v. Alford, --- F.3d ---, Case No. 08-1176 (6th Cir. July 6, 2009).</ref>  To the extent that public shareholders are protected, insiders and secured lenders become the primary targets of fraudulent transfer actions.

In certain cases, instead of declaring insolvency, the company negotiates a [[debt restructuring]] with its lenders. The financial restructuring might entail that the equity owners inject some more money in the company and the lenders waive parts of their claims. In other situations, the lenders inject new money and assume the equity of the company, with the present equity owners losing their shares and investment. The operations of the company are not affected by the financial restructuring. Nonetheless, the financial restructuring requires significant management attention and may lead to customers losing faith in the company.<ref name=Morningstar /><ref name=Moodys />