Disciplining Management or Guiding Management : Aligning Interests in Securitized Leveraged Buyouts

Leveraged buyouts (LBO) are generally explained in terms of a governance mechanism that disciplines management. It is operationalized by increasing the leverage of a firm, which has an implicit consequence of constraining management in the use of free cash flows. However, under a relatively new form of LBO known as securitized leveraged buyouts, private equity firms raise funds on the back of the acquired company's operating assets. A securitized LBO imposes explicit restrictions on management with regard to its freedom for carrying out strategy decisions. Management must also adhere to the conditions implied on the specified minimum level of performance. Using the case study of Hertz, we show how a securitized LBO can be structured more efficiently and what important decisions must be made in order to improve its debt service capacity