Borrowing in Buyouts
Posted: 8 May 2010
Date Written: September 30, 2009
Abstract
We develop and test a model of debt structure and pricing in leveraged buyouts (LBOs). The model accounts for both market and firm specific variables and illustrates how collateral, security and seniority, as well as target future cash-flows and market interest rates determine the cost of financing of the different layers of senior and subordinated debt. We test the model predictions on a global sample of 240 LBOs involving both private and public targets from 1997 to 2008. We show that collateral affects the pricing of senior and junior debt asymmetrically, in a manner that reflects the priority hierarchy of these claims. We also show that the relationship between amount of debt raised and pricing differs for firms with high and low collateral.
Keywords: Leverage buyout, capital structure, private equity
JEL Classification: G30, G34
Suggested Citation: Suggested Citation
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