Quos Custodiunt Custodes? Determinants of Capital Structure Dynamics in Leveraged Buyouts

Abstract

Leveraged buyouts allow for a separate study of sponsor reputation and underlying firm effects on capital structure choices. In 616 LBOs for which we can reconstruct lifetime financing activity, we find that the average LBO issues 2.16 loan packages, and 86% of new packages are refinancings. On average, new debt issuance significantly increases leverage and lowers borrowing rates, with interest savings cumulating to 7% of initial enterprise value. Dividend recapitalizations result in a 25% average increase in debt. The strongest correlate of new deal cost is the proportion of recent failures among the sponsor's other portfolio companies, suggesting that lenders monitor the sponsor at least as much as the underlying asset. We find that this monitoring is justified because poor deal outcomes display short-term persistence within sponsor.