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Rev Fin 1993; 6:959-982
© 1993 the Society for Financial Studies

Article

Bondholder losses in leveraged buyouts

A Warga1,z and I Welch2
1 School of Business Administration, University of Wisconsin-Milwaukee, 640 Bolton Hall, Milwaukee, WI 53201, USA
2 University of California, Los Angeles, USA
z Corresponding author

Abstract

Announcements of successful leveraged buyouts (LBOs) during January 1985 to April 1989 caused a significantly negative return on outstanding publicly traded nonconvertible bonds. Yet the average risk-adjusted debt holder losses are less than 7 percent of the average risk-adjusted equity bolder gains. Bond losses are related to the pre-LBO rating, but only weakly to equity holder gains. We demonstrate that trader-quoted data from a major investment bank offers conclusions about the effects of LBOs on debt holders different from those drawn from commonly used matrix and exchange-based data (such as Standard & Poor-'s Bond Guide data). This has important implications for event studies involving debt instruments.


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