Journal of Financial Economics Vol. 27 No. 1 1990
How risky is the debt in highly leveraged transactions?
Abstract
This paper estimates the systematic risk of the debt in public leveraged recapitalizations. We calculate this risk as a function of the difference in systematic equity risk before and after the recapitalization. The increase in equity risk is surprisingly small after a recapitalization, ranging from 37% to 57%, depending on the estimation method. If total company risk is unchanged, the implied systematic risk of the post-recapitalization debt in twelve transactions averages 0.65. Alternatively, if the entire market-adjusted premium in the leveraged recapitalization represents a reduction in fixed costs, the implied systematic risk of this debt averages 0.40.
- DOI
- 10.1016/0304-405x(90)90027-w
- Volume
- 27
- Issue
- 1
- Pages
- 215-245
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref