WORLD> America
Tribune collapse unlikely to be last
(Agencies)
Updated: 2008-12-10 07:56

Debt-laden companies bought with cheap money during the private equity boom are under increasing stress as the US economy worsens, and more are expected to follow media company Tribune into bankruptcy.

The collapse of the publisher of the Chicago Tribune and Los Angeles Times is the biggest yet among companies taken private in the leveraged buyout boom that ground to a halt in mid-2007, but it's unlikely to be the last.

While not a private equity deal, the buyout of Tribune by employees and real estate mogul Sam Zell was one of those that epitomized the credit boom. The company took on about $8 billion of additional debt when it went private.

Retailers have been particularly hard hit. Linens 'n Things, bought by New York buyout firm Apollo Management, filed for bankruptcy in May, and department store chain Mervyns Holdings LLC, previously acquired by Cerberus Capital Management LP and Sun Capital Partners, announced plans to liquidate in October.

"I think undoubtedly we will see more bankruptcies of private equity-backed firms, but also regular operating firms too," said Josh Lerner, professor specializing in private equity at Harvard Business School.

He cited a study released earlier in the year showing that a small percentage of deals over the history of the private equity industry worldwide have ended in a bankruptcy or a distressed reorganization.

However, failure rates appear to be far greater for megadeals concluded at the peak of buyout booms, Lerner said.

He cited a 1993 study which concluded that of the 66 largest deals done at the peak of the 1980s buyout boom, 38 percent experienced financial distress and 27 percent defaulted on debt repayments, often in conjunction with a Chapter 11 filing.