Secured Creditor Recovery Rates from Management Buy-outs in Distress

by David Citron of the City University,
Mike Wright of the Nottingham University,
Rod Ball of the Nottingham University, and
Fred Rippington of the City University

June 2002

Abstract: Buy-out literature suggests that secured creditors will recoup substantial proportions of the funds they extend to finance the initial buy-out. This paper uses a unique dataset of 42 failed MBOs to examine the extent of credit recovery by secured lenders under UK insolvency procedures and the factors that influence the extent of this recovery. On average, secured creditors recover 62 per cent of the amount owed. The percentage of secured credit recovered is increased where the distressed buy-outs is sold as a going concern and where the principal reason for failure concerns managerial factors. The presence of a going concern qualification in the audit report and the size of the buy-out reduce the recovery rate by secured creditors.

JEL Classification: G33, G32.

Keywords: Bankruptcy, Secured debt, Financial distress resolution.

Published in: European Financial Management, Vol. 9, No. 2, (June 2003), pp. 141-162.

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