Leveraged buyouts and bond credit spreads

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. (C) 2019 Elsevier B.V. All rights reserved.