[DanielHB]

What I don't understand is how the cost of banks repossessing these companies in case of default don't make the math unviable. Unless the company have a lot of fairly stable semi-liquid assets (like real estate) banks should be charging fairly high interest on these loans which would make most of these business unprofitable.

Which would increase the rate of defaults (if they are authorized in the first place) and in turn increase interest even further. I guess the PE is always maxxing out the leverage on every deal at _just_ the projected break-even point for loan repayment? But that leaves no room for error or changing market conditions which also increase the rate of defaults and so on.

[Ekaros]

Non-bank entities being in play is likely part of the problem. If you can sell the bad debt to some other entity say a fund that got investment from pension you win. For fund managers these things can look great on paper and that is everything that matters. Even if things do not workout they can on paper extend and pretend or take payment-in-kind. Meaning well you are short on interest payments so you just tack it on the principal.

And everyone gets their management fees until people start asking their money back...

[DanielHB]

Ah so it is related to that whole private debt markets, the loans these PE companies take are not with banks. It is related to that whole thing with Trump opening those kind of loan investments to ordinary americans and pension funds.

Great another financial crisis.

[Ekaros]

Most fun thing is that even if bank can't led to these sort of companies they can lend to companies that lend to them... So added fun. And well this has been going on for long time and cracks have started properly showing up more recently.

[floatrock]

> Unless the company have a lot of fairly stable semi-liquid assets (like real estate)...

That's exactly what happened famously with Red Lobster. PE sold off all the underlying real-estate to get the initial sugar-high and replaced it with a leasebacks. Those leases had escalating costs and fixed terms, which made it difficult to adapt to changing trends, and was a big contributor in what ultimately sunk it all.

[dapperdrake]

Does "the bank" know that it is unviable?

[DanielHB]

Check the other comment, apparently these loans don't come from banks, but rather from private debt markets. And most likely they don't know these loans aren't viable.