How Risky is the Debt in Highly Leveraged Transactions? Evidence from Public Recapitalizations / Steven N. Kaplan, Jeremy C. Stein.

Format:

Book

Author/Creator:

Kaplan, Steven N.

Contributor:

National Bureau of Economic Research.

Stein, Jeremy C.

Series:

Working Paper Series (National Bureau of Economic Research) no. w3390.

NBER working paper series no. w3390

Language:

English

Subjects (All):

Corporate debt.

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1990.

Cambridge, Mass. : National Bureau of Economic Research, 1990.

Summary:

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.

Notes:

Print version record

June 1990.