Firm-Specific Triggers of LBO Defaults

This study aims to provide a theoretical framework to explicate the specific attributes of leveraged buyouts, which may alter the probability of default in contrast to non-private-equity-backed firms. The author hereby suggests controlling for the asset liquidation potential as an additional source of cash flow available for servicing debt, the valuation of the investment, the strength of the negotiated covenants, the pressure of the target's refinancing need, and the stage of the fund's life cycle. In addition, the model is augmented by the capital market attractiveness, expressed by the debt capital market liquidity and the risk aversion of bond investors. Finally, industry attractiveness in terms of industry rivalry, volatility of the sector, and the historical sector default rates may provide significant insights into the probability of default.