New NCEO Study on Default Rates for ESOP Loans

Based on an analysis of 1,232 leveraged ESOP transactions at three large banks, 1.3% of ESOP companies in the sample defaulted on their loans in a way that imposed losses on their creditors for loans in effect between 2009 and 2013 (an average annual rate of 0.2%). The defaults accounted for 1.5% of the total value of the ESOP loan portfolio for these companies during this period. The bank data were only available for defaults imposing losses; the data presented here do not include defaults that resulted in loan restructuring where the loans were ultimately repaid or were being paid on the new schedule.

In a parallel analysis, the NCEO also asked ESOP appraisal firms to provide data on defaults that imposed losses on their creditors among the ESOP companies whose stock they appraised between 2009 and 2013. Eighteen firms responded out of the 40 ESOP appraisal firms we asked to provide data. The eighteen responding firms were able to report data on 845 companies over the study period. Of these, 9 (1.1%, or an annual rate of 0.2%) defaulted in a way that imposed losses on their creditors, while 26 (3.1%, or an annual rate of 0.6%) had to restructure their loans but had repaid or were repaying their loans currently.

These default rates seem strikingly low given the economic turmoil of 2008-2011, a period that overlaps and immediately precedes the data represented here. It is difficult to make valid comparisons to data for defaults on leveraged buyouts of non-ESOP companies. The best available comparison data comes from S&P's IQ Credit Pro report on default rates for mid-market companies borrowing less than $200 million. ESOPs would all be in this range, although the median ESOP loan would no doubt still be much smaller than the median for the S&P sample (data for smaller loans is not available). These loans defaulted at 3.75% per year from 2010 to 2013 and 1.99% for the period 2003 to 2013. Defaults here are defined as those imposing losses on creditors.

The full analysis is available online and PDF versions of both a summary report and a full report (PDF).