10

If you have Corporate Bonds in a company and that company is bought out, by a Private Equity Firm. What happens to the bonds that were issued? Is the new Private Equity Firm responsible for that debt?

14

Dheer is correct in the general case (and probably all Private Equity cases), however, there are a few exceptions:

  • Buyers can offer to "assume" the liabilities of the acquired company in exchange for a lower purchase price. In that case, the debt is transferred to the acquiring company
  • Individual bonds may have "change of control" clauses that allow bondholders to redeem their bonds at a specified value if there is a corporate takeover, acquisition, or merger. These are known as "poison puts" since it can make the company mush less attractive for a takeover if their debt has to be redeemed at rates much higher than market.
  • +1. If no offer to "assume" debt, and no "change of control" clauses on some/all bonds, what will happen? Can some bonds have "change of control" clause and some not have it, for the same issuer? Is such situation a "Full employment of lawyers" act :-) , and litigation ensues? – Peter M. Aug 16 '17 at 18:01
  • @PeterMasiar Yes some bonds can have it and some not for the same issuer. Not sure what you mean by the second question. – D Stanley Aug 16 '17 at 18:06
  • This seems open to abuse to my (admittedly not very informed) mind. Would a bond have to have a clause specifically allowing a transfer of liability for that to be possible? If not, it seems to me that the creditor accepts unlimited risk since his bond can be transferred arbitrarily to an entity with a totally different risk profile to what he intended. – JBentley Aug 16 '17 at 18:13
  • 1
    @JBentley True - bond prices can fall when a company is bought by a riskier company, but the opposite is true (and probably more common) as well. – D Stanley Aug 16 '17 at 18:33
  • @DStanley - Thank you. My second question was a joke. I would assume if buyer did not assumed debt and your bond has no "change of control" clause, you are out of luck and this risk is part of the risk you assume as investor, correct? Probably the cost of litigation would be more than the amount average (small) investor can recover from such situation. Good to know. – Peter M. Aug 16 '17 at 18:55
12

Is the new Private Equity Firm responsible for that debt?

Say Company A has issued Corporate Bonds, even if the ownership changes to Private Equity firm; the entity Company A remains the same and is still responsible for the debt.

If Company A merges with another company [a Private Equity Firm], then the new entity is responsible for all the debts.

0

Just to point out the obvious - the bonds you purchased from some company is debt to them - just like if they have a bank loan or a mortgage (obviously placed differently in the hierarchy, but still debt none the less). This relates to regular bonds - not special circumstances with e.g. Hybrids or other term that may have been written.

Debt doesn't go away by change in ownership - remember ownership only relates to the value of the companys equity - not its debt.

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.