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The National Center for Employee Ownership (NCEO) recently analyzed 1,232 leveraged ESOP transactions at three large banks found 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, or an 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 us data on defaults among the ESOP companies they appraised between 2009 and 2013. Eighteen firms were able to report data on 845 companies over the study period.  Of these, nine, or 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.

Both the bank data and the data from the appraisal firms come from a wide variety of companies. The loan sizes ranged from less than $1 million to well over $50 million, and companies were in a variety of industries, including especially manufacturing, wholesale, and construction. The number of people employed at the businesses ranged from under 50 to several thousand.

Estimating the default rates on ESOP loans is essential to evaluating two of the most common criticisms of ESOPs, namely that they are excessively risky and appraisals tend to be too aggressive, causing ESOPs to overpay for the shares.  Both criticisms suggest that the default rates on ESOP loans should be high, which does not seem to be the case with the loans included in this sample.

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