← Search

Journal of Corporate Finance Vol. 18 No. 1 2012

Leverage and pricing of debt in LBOs

Paolo Colla1; Filippo Ippolito2,3,4; Hannes F. Wagner1,5

1 Bocconi University · 2 Barcelona School of Economics · 3 Universitat Pompeu Fabra · 4 Centre for Economic Policy Research · 5 Institute for Economic Research

open access

Abstract

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.

DOI
10.1016/j.jcorpfin.2011.11.003
Volume
18
Issue
1
Pages
124-137
Language
en
Sources
bibtex:phds-export.bib crossref openalex

Cite