Sponsor reputation and capital structure dynamics in leveraged buyouts
55 Pages Posted: 18 Feb 2021 Last revised: 6 Feb 2023
Date Written: March 1, 2022
We examine whether LBO sponsors’ reputations as borrowers affect the refinancing terms of their portfolio companies. In 515 U.S. LBOs for which we can reconstruct debt financing activity throughout the holding period, 66% of financing events occur one quarter before the earliest existing debt maturity. These reasonably exogenous On Time events generally improve borrowing terms while Early events feature more dividends, leverage, and higher cost. In both cases, dividend issuance decreases and cost increases with the proportion of recent failures among the sponsor’s other holdings. Effects are procyclical; sponsors with recent failures miss opportunities to decrease costs in good times.
Keywords: Leveraged buyout, capital structure, reputation
JEL Classification: G23, G24, G31, G32, G34
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