A leveraged buyout is when some person or persons borrows money to buy a company. From what I’ve read, the company ends up owing the money to the lenders rather than the people who actually borrowed the money. Why is this?
It’s no different than buying a house with a mortgage. You borrow money to buy a thing that is going to make money, then either use the money that thing is making to pay off the debt, or sell the thing later on for a higher price, pay off the original debt and pocket the difference. The “leverage” bit refers to buying anything with debt. Buy a house with $10k of your own money and a $90k mortgage, you’re using 10:1 leverage. If this plan doesn’t work out, the bank takes the thing.
The cool thing about leverage is the ROI.
Take $10K of your own money, $90K mortgage, flip for $150K, pay back the $90K and you’ve made quite a profit on your $10K (even subtracting expenses, interest, etc.)
The numbers look really good for the millions involved in a big business deal.
To address the original question, the buyers could sell their debt to the company, or more likely have the business borrow even more money and pay themselves back.
The original purchase deal could have involved the debt as well.
Or the group or company that owns the bought-out shares pledges the profits (dividends from those shares) go to pay the bonds. As the new owners of 100% of the shares, they can set the dividend level. Since default means the shares are forfeit in bankruptcy court, they are motivated to make the payments.
In any of these sorts of arrangements, rarely does the group doing the LBO personally make the deal. They form some sort of company, which then assumes the debt and liabilities. SO the people themselves are not liable, just in case someone screws up the economy and the deal goes sour; they won’t lose their house, limo and bank account. Just the workers will.
Of course, as SmartAlecCat points out, part of the deal could be to promise that the bought-out company will sign on as a guarantor of the debt too once the deal is done. As owners of 100% of the company, the new owners can do this. Whether default means the lenders get the company assets or the 100% shares of the company, what difference?