Interpretation Of The Current Situation Of Leveraged Buy-Out In China

In recent years, emerging insurance companies have launched large scale listing of listed companies, the main tools are leveraged mergers and acquisitions and universal insurance.

This paper aims to study the development of the US leveraged buyout boom and junk bond market in the 80s of last century, and its implications for the current leveraged buyout in China.

Leveraged buyout is a double-edged sword: the boom in emerging industries, the default of bonds and the collapse of savings and loan institutions.

The boom of junk bond market and leveraged buyout on the one hand effectively promoted the development of small and medium-sized enterprises and emerging industries in the United States. In 70s, they only used severe bank credit to raise funds. In late 70s and 80s, the source of funds was greatly liberated. Through leveraged buy-out, many industries, especially emerging industries, were restructured, especially in the media and telecom industries. The two industries accounted for 37% of the total market bond issuance.

On the other hand, it also spawned the junk bond bubble and the subsequent default tide and the collapse of the savings and loan institutions.

The final effect of M & A depends on whether the corporate governance can be significantly improved after M & A.

In 80s, the average default rate of high-yield debt was less than 4%, up to 1991.

The default rate rose to an unprecedented high of about 11%.

And led to the large-scale bankruptcy of the savings and loan institutions. Over the past 10 years, more than 1800 savings and loan institutions went bankrupt in 1981-1990 years, and the US government paid 166 billion dollars for the crisis.

The rise of leveraged mergers and acquisitions in the US in 80s: junk debt,

And asset shortage.

The Reagan administration's "economic recovery plan" policy led to a low valuation at that time.

The demand for mergers and acquisitions has been increased during the economic downturn.

The US interest rate liberalization in 80s led to a rise in debt and competitive costs of the savings and loan institutions, as well as a surge in demand for high-yield assets and a shortage of assets, which provided buyers for junk bonds.

The government's relaxation of financial regulation and the intensification of competition among financial institutions themselves.

At that time, the rule of law environment in the United States was relatively loose, and there was no specific provision for the raising of funds for high-yield debt.

Milton and junk debt financing: leveraged buy-out and doorway barbarians.

Milken direction

Sell the "low rated bonds" for a long time with higher investment returns.

The financing channels of leveraged M & a business can be divided into three categories: top level capital - Secured senior debt (about 60%, provided by banks); interlayer capital - unsecured debt (about 30%, junk debt provision); underlying capital - a small number of stocks (about 10%, paction core).

The sandwich business can be realized perfectly through the junk debt business, while Milken provides a very convenient convenience for M & A in the mezzanine capital.

The RJR Nabisco case is a classic case of management and the "barbarian savage" competition, which shows the amazing scene of snake eating elephants.

China's leveraged buyout and universal insurance.

1) comparison between universal insurance and junk debt.

The common point of universal insurance and junk debt is that the cost of raising funds is relatively high. This kind of capital cost will force universal risk to allocate high-risk assets or increase the proceeds of capital by means of relaxing guarantee and lengthening leverage, which may exist in itself, such as mismatch of assets and liabilities, mismatch of maturity and high liquidity risk. This is similar to the practice of American savings and loan institutions in the context of interest rate marketization in 80s.

2) the background of China's leveraged mergers and Acquisitions: interest rate liberalization, asset shortage and the rise of new insurance companies.

China's asset shortage in recent years is mainly due to three main reasons: first, the decline in the potential growth rate of the economy and the decline in the return on assets; two, the over 2014-2016 years of monetary development; three, the marketization of interest rates and financial innovation, forcing financial institutions to deploy high-risk assets in exchange for relatively high returns.

3) the policy of leveraged mergers and acquisitions is gradually liberalized.

4) China's leveraged buy-out system has much room for operation. There are many regulatory gaps in emerging insurance companies such as bank financing, brokerage management and so on.