Structure and Determinants of Financial Covenants in Leveraged Buyouts*

Achleitner, Ann‐Kristin; Braun, Reiner; Hinterramskogler, Bastian; Tappeiner, Florian

doi:10.1093/rof/rfq031

Cited by 32 publications

(13 citation statements)

References 64 publications

(95 reference statements)

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“…In addition, we find also strong empirical support for Hypothesis 2.3b stating that more experienced and reputed PE sponsors use more leverage to finance a transaction. This is also in line with the results reported by Demiroglu and James (2010), Ivashina and Kovner (2011) and Achleitner et al (forthcoming). Our proxies for PE sponsor reputation and experience are statistically significant (PE fund generation at 1% level and PE sponsor age at 5% level) and positively related to deal leverage in our first stage regressions.…”

Section: The Drivers Of Pricing In Buyoutssupporting

confidence: 91%

“…Consistently with the grandstanding hypothesis in the venture capital industry proposing that IPOs of companies backed by younger venture capital firms are more underpriced compared to those conducted by more established venture capital firms (Gompers, 1996), first time funds may have incentives to exit investments too early. In addition, higher reputed PE sponsors are less likely to sell heavily overpriced companies since they do not want to risk their reputation (see, e.g., Achleitner et al, forthcoming). Altogether, bidders buying a company from a relatively unknown PE sponsor might demand a discount on the purchase price in order to account for the existing information asymmetries about the portfolio company's condition, especially when the portfolio company is sold while the PE sponsor is simultaneously raising a follow‐on fund.…”

Section: Literature Review and Hypothesesmentioning

confidence: 99%

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Value creation and pricing in buyouts: Empirical evidence from Europe and North America

2011

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Using a unique proprietary data set of 1980 realized and unrealized buyouts completed between 1986 and 2010, we examine entry and exit pricing in buyouts and its influence on private equity (PE) sponsors' returns. We find that besides leverage and operational improvements, EBITDA multiple expansion (i.e. the difference between entry and exit pricing) is a fundamental factor in explaining equity returns and the result of skill rather than pure luck. We also provide evidence that more experienced PE sponsors use more debt to finance a PE transaction and debt is positively related to entry buyout pricing. However, for a transaction with a given leverage level, more experienced PE sponsors are able to negotiate lower prices. In addition, our results show that deals conducted by first time funds which are realized in a later stage of a fund's life cycle are associated with lower exit prices which can be explained by the increased exit pressure for the PE sponsor.

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Section: The Drivers Of Pricing In Buyoutssupporting

confidence: 91%

Section: Literature Review and Hypothesesmentioning

confidence: 99%

Value creation and pricing in buyouts: Empirical evidence from Europe and North America

2011

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“…It is worth to note that this classification is related to the classification on balance sheet and income statement covenants made by Demerjian but Christensen and Nikolaev prefer the labels "capital" and "performance" because they better describe the economic nature of these covenants and the underlying mechanisms through which they address agency problems and furthermore the authors claim that classifying some covenants to the group of balance sheet or income statement covenants is somewhat arbitrary. Achleitner et al (2012) indicate that financial covenants can be classified into two fundamental types: incurrence and maintenance financial covenants. Incurrence financial covenants restrict the actions of borrowers that might extract wealth from debt holders (like an acquisition or an issuance of additional debt) if certain accounting-based thresholds are not satisfied.…”

Section: Review Of the Literaturementioning

confidence: 99%

Structure and restrictiveness of financial covenants in bond contracts on Catalyst

Brycz

Pauka

Śmieja

2015

Zesz. Nauk. US Fin. Ryn. Fin. Ubezp.

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Purpose -The aim of the paper is to study the role of financial covenants in contract of bonds quoted on Polish regulated market called Catalyst. We analyze types and features of financial maintenance covenants and their restrictiveness in regard to limiting conflict of interest between shareholders and bondholders. Design/Methodology/Approach -We review the related literature and conduct research based on hand collected database of covenants. Findings -We notice that Polish public bond issuers use financial covenants relatively rare. The most common types of financial maintenance covenants are based on balance sheet and determine the greatest acceptable leverage. Issuers usually avoid using performance covenants and if they decide to use it, the threshold value is zero or negative. Neither the number of financial covenants nor financial slack are correlated with seize or leverage of issuers. Originality/Value -There is a gap in Polish research on bonds contracts' requirements and our study is the first (although introductory) attempt to explore this field which is very popular in foreign studies.

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“…Because of repeated buyout transactions, PE firms have accumulated significant expertise in designing covenants. Therefore, empirical study suggests that PE-sponsored loans include more financial covenants than non-sponsored ones (Achleitner et al 2012).…”

Section: Literature Review and Concept Developmentmentioning

confidence: 99%

Covenant Design in Financial Contracts: A Case Study of the Private Equity Acquisition of Hca

Wei

Lee

Huang

et al. 2015

International Journal of Strategic Property Management

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A buyout deal involves several parties, including private equity firms, the target company, and lending banks. All these parties are legally connected by contractual arrangements, and covenants among all interest parties are important. However, a comprehensive study on designing covenants among parties in a buyout deal to achieve commitment and avoid risk in closing a deal is seldom seen in current literature. By investigating one of the world's largest buyout deals -the acquisition of Hospital Corporation of America (HCA), this paper not only probes into the design of contracts and covenant, but also provides several managerial implications. This paper concludes that well-designed covenants in buy-out deals can appropriately align all participants' diversified interests.

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Structure and Determinants of Financial Covenants in Leveraged Buyouts*

Cited by 32 publications

References 64 publications

Value creation and pricing in buyouts: Empirical evidence from Europe and North America

Value creation and pricing in buyouts: Empirical evidence from Europe and North America

Structure and restrictiveness of financial covenants in bond contracts on Catalyst

Covenant Design in Financial Contracts: A Case Study of the Private Equity Acquisition of Hca

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