NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

How Risky is the Debt in Highly Leveraged Transactions? Evidence from Public Recapitalizations

Steven N. Kaplan, Jeremy C. Stein

NBER Working Paper No. 3390 (Also Reprint No. r1602)
Issued in June 1990
NBER Program(s):   ME

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.

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Document Object Identifier (DOI): 10.3386/w3390

Published: "How Risky is the Debt in Highly Leveraged Transactions?" From Journal of Financial Economics, Vol. 27, No. 1, pp. 215-245, (October 1990).

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