Leveraged Buyouts: Gravedancers’ Payday

By Janet Tavakoli July 25, 2025

LBO Risks in 2025

Leveraged buyouts (LBOs) remain a cornerstone of private equity, driving massive deals that reshape industries but often leave companies burdened with unsustainable debt. In 2013, I highlighted the risks of LBOs, from junk bond-fueled excesses to tax maneuvers that prioritize insiders over stakeholders. Today, in 2025, these risks persist, amplified by rising interest rates, stricter SEC regulations on private funds, and high-profile LBO failures in sectors like healthcare and retail. This updated article revisits the dangers of LBOs, drawing on historical cases like Texas Energy Futures Holdings (TXU) and the Chicago Tribune, while connecting them to modern trends. With private equity’s influence growing—global buyout deal value hit $1.1 trillion in 2024, per PitchBook—understanding LBO pitfalls is more critical than ever.

LBO History: Major Failures

LBO Debt RIsk: TXU Case

On April 29, 2014, The New York Times reported that Texas Energy Futures Holdings (TXU), the largest leveraged buyout in history at $45 billion, filed for bankruptcy after running out of cash. This collapse exemplified the dangers of LBOs, where excessive debt cripples companies that might otherwise survive economic downturns.

In 2011, Bloomberg noted Goldman Sachs overtook Deutsche Bank as Europe’s top junk bond underwriter, capitalizing on a high-yield bond rally. As I commented at the time:

“Underwriters made a lot of fees in the first half,” said Janet Tavakoli, founder of Chicago-based Tavakoli Structured Finance Inc., a financial consulting firm. “The high-yield bond rally isn’t sustainable, certainly not in Europe. Now that we have a lot of uncertainty and a little bit of panic in Europe, investors are going to avoid these high-yield deals. You could have impaired earnings for a long time.”

This prediction proved prescient, as the rally faltered amid European economic uncertainty, leaving investors exposed to impaired earnings.

Quiznosis’ LBO at the market’s peak showed how quickly debt-heavy deals can ruin companies. Low interest rates under Ben Bernanke’s policies propped up the junk bond market, masking dismal growth prospects. In the secondary trading market, investors faced wide bid/ask spreads in a “dark pool” environment, where a few traders controlled liquidity, gouging investors.

Deadly LBO Debt: Fees and Windfalls

LBOs generate massive fees for underwriters, but investors not involved in primary deal-making face significant risks. Beyond fees, “dividend recapitalizations” drain cash from struggling companies, allowing private equity insiders to recover their investment plus windfall returns before allocating funds to operations.

In theory, LBOs rely on retained earnings and cash flows to service debt. In practice, companies barely meeting payments in good times take on crushing debt, leading to Chapter 11 bankruptcies when markets turn. Even successful LBOs can destroy companies through liquidation, as seen with Beatrice Foods in the 1980s.

LBO Tax Fallout: Chicago Tribune

Allan Sloan’s 2013 Fortune exposé dubbed Sam Zell the “Gravedancer” for his role in bankrupting the Chicago Tribune. Zell’s 2007 LBO loaded the Tribune with debt, leading to its Chapter 11 filing by 2008 and emergence in 2012. Thousands lost jobs, and pensions were decimated.

Zell also faced IRS scrutiny for tax maneuvers. In 2009, Sloan reported Zell converted the Tribune from a C corporation to an S corporation to dodge taxes before spinning off the Chicago Cubs. The Tribune retained a 5% equity interest, while the Ricketts family held 95%. The Tribune guaranteed part of the partnership’s debt—a worthless gesture from a bankrupt entity. Sloan noted:

“A debt guarantee from a bankrupt company? What’s that worth? Can you spell ‘nothing’?”

The IRS challenged these “form over substance” transactions, targeting the Cubs and Newsday sales. Tax expert Bob Willens estimated potential liabilities of $600 million, with the Newsday deal alone at $273 million. The Tribune likely settled at a discount, but the case exposed LBO-driven tax avoidance.

LBO Risks in 2025: New Challenges

Fast-forward to 2025, and LBO risks remain stark. Rising interest rates—following the Federal Reserve’s hikes through 2023—have strained highly leveraged companies. The SEC’s 2023 Private Fund Advisers Rule, requiring greater transparency, has spotlighted private equity’s fee structures and dividend recapitalizations. Recent LBO failures, like the 2023 bankruptcy of a major healthcare provider backed by private equity, echo TXU’s collapse. Per S&P Global, 15% of leveraged loans in 2024 were distressed, signaling ongoing junk bond vulnerabilities.

Private equity firms continue to extract dividends, often at the expense of long-term company health. For example, a 2024 WSJ report highlighted how dividend recapitalizations in retail led to layoffs and store closures. My ongoing research into financial misconduct link to your C-Span foreclosure fraud post (#) reveals parallels: just as mortgage lenders inflated incomes during the 2008 crisis, private equity firms today inflate valuations to justify debt-fueled payouts.

The junk bond market faces new pressures. With $1.2 trillion in high-yield bonds outstanding in 2024 (per Bloomberg), investors face risks from PIK-toggle bonds, which allow companies to pay interest with more debt, delaying defaults but not preventing them. The opacity of secondary trading markets persists, with wide bid/ask spreads penalizing investors. Investors may also find that private equity firms have skimmed the LBO cream from the deals and used the disadvantaged remainder as collateral in portfolios for collateralized fund obligations.

LBO Solutions and Outlook

To mitigate LBO risks, regulators should enforce stricter debt-to-equity limits and scrutinize dividend recapitalizations. Investors must prioritize due diligence, reading financial reports to assess cash flow sustainability—there’s no substitute for this. Tax authorities, as seen in the Tribune case, must continue challenging form-over-substance dodges, especially in cross-border deals.

As private equity’s influence grows, so does systemic risk. The lessons of TXU, the Tribune, and recent failures underscore the need for transparency and accountability. Without reform, LBOs will remain a gravedancers’ payday, leaving employees, investors, and taxpayers to bear the cost.

Related Articles

Tavakoli, Janet. “Collateralized Fund Obligations (CFOs): Complete Guide.” Tavakoli Structured Finance, June 2025.

Tavakoli, Janet. “Stock Options: The Hidden Cost that Demands Transparency.” Tavakoli Structured Finance, July 2025.

References

Cooper, Laura and Santilli, Peter. “Buyout Shops Go From Boom to Bust to…Meh.” Wall Street Journal, Sept. 5, 2024.

Creswell, Julie, and de la Merded, Michael J. “Settling the Bets of the Private-Equity Megadeal’s Golden Age.” New York Times Dealbook, April 29, 2014.

Federal Reserve Board. “Pre-LBO Credit Market Conditions and Post-LBO Target Behavior.” Finance and Economics Discussion Series 2023-080. Washington: Board of Governors of the Federal Reserve System, December 2023.

Sloan, Allan. “Zell’s legacy lives on: IRS goes after Tribune.” June 18, 2013.

Tavakoli, Janet. “Collateralized Fund Obligations (CFOs): Complete Guide.”

Wirz, Matt and Baer, Justin. “The Junk-Bond Market’s Newest Big Buyer: Goldman Sachs.” Wall Street Journal, January 8, 2016.