Covenant Design in Financial Contracts: A Case Study of the Private Equity Acquisition of HCA
International Journal of Strategic Property Management, Volume 19, Issue 4, 2015
12 Pages Posted: 28 Dec 2015 Last revised: 19 Sep 2019
Date Written: December 27, 2015
A buyout deal involves several parties, including private equity firms, the target company, and lending banks. All these parties are legally connected by contractual arrangements, and covenants among all interest parties are important. However, a comprehensive study on designing covenants among parties in a buyout deal to achieve commitment and avoid risk in closing a deal is seldom seen in current literature. By investigating one of the world’s largest buyout deals – the acquisition of Hospital Corporation of America (HCA), this paper not only probes into the design of contracts and covenant, but also provides several managerial implications. This paper concludes that well-designed covenants in buy-out deals can appropriately align all participants’ diversified interests.
Keywords: private equity; leveraged buyout; covenants; acquisition; financial contracts
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