The Buyout of AMC Entertainment

1. Describe how the environment for leveraged buyouts has changed from the late 1980s to the present. In your opinion, which of these changes has had or will have the most influence on LBO sponsor returns going forward?

The environment for leveraged buyouts (LBO) has changed a lot since the 1980s. From 1985 to 1989 the annual total leveraged buyout volume grew from around $15 billion to about $77 billion. Needless to say the market was booming and everyone was trying to get a piece of the pie. The growth was “aided by the development of the high-yield bond market, which provided public market financing for the deals.” Issuance of these bonds grew from $1.3 billion to $30.3 billion from 1980-1986. No one expected for the LBO market to unravel but by the late 1980’s this market began to “fray.” In 1991 the total leveraged buyout volume dropped to less than $10 billion. The crash was due to the high valuations paid due to the vast amount of ready financing such as the high-yield debt. Ultimately excessive leverage, movement toward risky LBO targets, and an “overheated” market led to a collapse. In the late 90s LBO activity began to spark back up and both volume of LBOs and the average value grew significantly. Exit multiples were growing as well, the financing however became much different. Equity contributions grew almost 3 fold from the late 80s to the late 90s and early 2000s. The components of returns in LBOs also shifted drastically from the late 80s to late 90s financial leverage became a smaller component and the contribution from operating improvements grew greatly. Looking forward the most important change that will have an influence on LBOs going forward will likely be the change in the components of buyout returns seen in Exhibit 5. From the late 80s to the late 90s financial leverage decreased its component of