Using Distressed Debt to Take a Company Private

An investment firm may turn a public firm into a private firm by buying its distressed debt.  The target firm may be going through bankruptcy proceedings, close to defaulting or already defaulted on its debt.  There are four main methods of buying a company.  A leveraged buyout (LBO) may not have worked.  As part of the LBO, the banks providing financing issued debt to the buyside.  In this case, new investors will buy the loans of the failed deal at distressed prices.  During the bankruptcy process, the debt investors will receive all the equity of the target firm.  A second way is to buy the company's equity and initiate a turnaround of the company.  The last two methods involve Chapter 11 bankruptcy.  Before filing for Chapter 11, a reorganization plan where the debt holders convert their bonds to equity and become majority equity holders.  The public equity owners are wiped out completely.  The last method requires a major debt holder, primarily the company's competitor, to propose a reorganization plan.  This allows the competitor to obtain non-public material information about the target company and initiate a takeover.