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LBO risk and credit spreads


Journal of Financial Economics



Publishing details

Journal of Financial Economics 2020 Vol 135:3 p 577-601

Authors / Editors

Eisenthal-Berkovitz Y;Feldhutter P;Vig V


Publication Year



Recent decades have witnessed several waves of buyout activity. We find leveraged buyouts (LBOs) to be a significant concern for bondholders by showing that a) intra-industry credit spreads increase upon an LBO announcement, b) yields on bonds without event risk covenants are, on average, 21 basis points higher than those on same-firm bonds with such covenants, and c) structural models calibrated to historical LBO events imply an impact of 18–21 basis points on 10-year credit spreads. The impact is strongest in expansion periods and for bonds with maturities of 10–20 years.

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