How Risky is the Debt in Highly Leveraged Transactions? Evidence from Public Recapitalizations

40 Pages Posted: 11 Apr 2011

See all articles by Steven N. Kaplan

Steven N. Kaplan

University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER)

Jeremy C. Stein

Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: June 1990

Abstract

This 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.

Suggested Citation

Kaplan, Steven Neil and Stein, Jeremy C., How Risky is the Debt in Highly Leveraged Transactions? Evidence from Public Recapitalizations (June 1990). NBER Working Paper No. w3390. Available at SSRN: https://ssrn.com/abstract=1805445

Steven Neil Kaplan (Contact Author)

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Jeremy C. Stein

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