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Leverage and pricing of debt in LBOs

  • Colla, Paolo
  • Ippolito, Filippo
  • Wagner, Hannes F.

We show that the structure and pricing of debt in LBOs mostly depend on a single characteristic of the target firm, pre-LBO profitability. We find a positive relationship between pre-LBO profitability and deal leverage that is consistent with a dynamic trade-off theory of capital structure in the presence of adjustment costs. We argue that the wide range of debt tranches used in LBO financing can be folded into two main categories, senior and junior debt, where the pricing of senior and junior debt depends on their relative use and on bankruptcy risk. Our evidence also suggests that senior lenders oversupply cheap credit during hot buyout markets.

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Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 18 (2012)
Issue (Month): 1 ()
Pages: 124-137

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Handle: RePEc:eee:corfin:v:18:y:2012:i:1:p:124-137
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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