How Risky is the Debt in Highly Leveraged Transactions? Evidence from Public Recapitalizations
AbstractThis paper presents estimates of the systematic risk of the debt in public leveraged recapitalizations. We calculate the systematic risk of the debt as a function of the difference between the systematic equity risk before and after the recapitalization. The increase in equity risk is surprisingly small after a recapitalization, ranging from 28% to 52% depending on the estimation method. Under the assumption that total company risk is unchanged, the implied systematic risk of the post-recapitalization debt in twelve transactions averages 0.67. Under the alternative assumption that the entire market adjusted premium in the leveraged recapitalization represents a reduction in fixed costs, the implied systematic risk of this debt averages 0.42.
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Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 3390.
Date of creation: Sep 1991
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