Do leveraged buyouts overburden companies with debt?

An article in today's Wall Street Journal (and also posted on Moneyweb) warned about the potential for disaster caused by the heavy debt loads imposed on companies being taken private through leveraged buyouts. Since 2002, the average debt to EBITDA ratio for companies acquired through leveraged buyouts has risen from 4 to over 5. Station Casinos, which recently received a buyout offer, could tip the scales with a debt to cash flow ratio of over 9. Is there danger ahead?

While it would be naive to think that some of the leverage buyouts of this past year won't end in bankruptcy, the news may not all be bad. In an era of executive overcompensation, heavy debt loads impose fiscal discipline on management. It is very difficult for a company to squander money on expensive office fixtures and foolish acquisitions when it is barely generating enough cash to meet its interest obligations.

The downside risk is that a large economic downturn or unforeseen disaster could toss these heavily-leverage companies into dire financial straits that cannot be avoided through strong discipline. But overall, big debt loads force executives to be more frugal with owner resources. When I look at stocks, I like to see the company taking on a certain amount of debt. Oftentimes, these are the best-run companies.