The effect of change-in-control covenants on takeovers: Evidence from leveraged buyouts

Going private transactions, bondholder returns, and wealth transfer effects

“…Substantially less research documents the abnormal returns to pre-buyout bondholders. Exceptions are Marias et al (1989), Asquith and Wizman (1990), Cook et al (1992), Warga and Welch (1993) and Billett et al (2010). Aside from Marias et al (1989), who find insignificant abnormal returns in a twoday announcement window, the remaining studies find significant losses to bondholders surrounding going private transactions and relate the magnitude of these returns to bond characteristics, such as maturity and covenant protection.…”

“…This finding adds to the understanding of the sources of gains to stockholders during going private events. The recent paper by Billett et al (2010) explores the role of bondholder wealth expropriation in LBOs. Similar to our findings, they use bond pricing data from the 2000s and find significantly negative bondholder returns for bonds without a change of control covenant and positive returns for bonds with such covenant.…”

Leveraged Buyouts: A Survey of the Literature

“…Correspondingly, Cook, Easterwood and Martin (1992) find that bondholder losses are sensitive to the presence of restrictive covenants. Billett, Jiang, and Lie (2010) confirm, using a sample of LBOs from 1980 to 2006, that bondholders protected by change-in-control covenants do indeed earn positive returns, but that -although protective covenants have become gradually more widely adopted since the end of the 1980s -unprotected bondholders experience losses. Still, Amihud (1989) explains that the wealth transfer does not represent a loss for bondholders, but is rather a recuperation of the protection, which was greater than originally contracted for.…”

“…In response to the observed expropriation of bondholder wealth in the 1980s LBO wave, the US introduced change-in-control covenants to protect bondholders. Investigating the effect of such protection on the returns to bondholders in the second LBO wave, Billett et al (2010) report abnormal announcement returns to bondholders lacking covenant protection of -6.76%, whereas protected bondholders earn +2.30%. They conclude that expropriation of bondholders remains an important determinant in LBOs and that the wealth effects to bondholders depend on the existence of such change-in-control covenants.…”

The firm lifecycle as a determiant of going private decisions

“…We expect firms with low amount of RE/TE (TA) to have a higher probability of becoming a voluntary going private firm. The going private (again similar to the M&A) research is often amended by studies that analyze the ability of gaining abnormal returns through going private transactions (Billett, Jiang, & Lie, 2010;DeAngelo, DeAngelo, & Rice, 1984;Denis, 1992;Lehn & Poulsen, 1989;Renneboog, Simons, & Wright, 2007). 2523-6547 -Copyright: © 2017 The Authors.…”