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School of Business | Department of Finance | Finance | 2015
Thesis number: 13858
Determinants of bankruptcies in leveraged buyouts
Author: Virkkala, Otto-Ville
Title: Determinants of bankruptcies in leveraged buyouts
Year: 2015  Language: eng
Department: Department of Finance
Academic subject: Finance
Index terms: rahoitus; financing; yrityskaupat; corporate acquisitions; konkurssit; bankruptcy; syklit; cycles; pääoma; capital; sijoittajat; investors
Pages: 87
Full text:
» hse_ethesis_13858.pdf pdf  size:2 MB (1316518)
Key terms: leveraged buyout, bankruptcy, bankruptcy likelihood, cyclicality, financial distress, private equity, leverage

In this thesis, I study the determinants of bankruptcies in leveraged buyouts. By constructing a large cross-sectional sample, my objective is to recognise factors that are associated with the probability that a leveraged buyout would go bankrupt. Factors of interest are deal source, financial strength, leverage, industry cyclicality, prevailing economic condition and credit market favourability and initial financial distress risk. Overall, the focus of this study is to explain determinants of failed LBOs rather than successful ones. Hence, the events of bankruptcy form the most prolific data points. All non-bankrupt buyouts, regardless of their eventual return-on-investment, are considered non-failed.


My sample consists of 22,796 leveraged buyouts conducted in the U.S., Canada and Europe from 1982 to 2013. The data is derived from Capital IQ database which quite well represents the actual population of leveraged buyouts for the period. I determine bankruptcies by using multiple sources and methods, and conclude that the sample's bankruptcy rate (6.1%) is in line with previous literature. I assess the determinants of the binary event of bankruptcy with probit regressions and apply Heckman sample-selection model to correct misspecification errors for the estimates considering scarcely available financial statement information. The analysis of initial financial distress risk, measured as Altman Z, is performed with ordinary least squares regression.


The initial deal source significantly affects the outcome of the buyout. Buyouts of previously bankrupted, publicly listed and younger companies are associated with higher bankruptcy rates. Meanwhile secondary buyouts, privatizations and cross-border transactions are significantly less likely to go bankrupt. Also, management equity participation appears to reduce the risk of insolvency. Club deals on the other hand appear to have no significant effect on bankruptcies. The results also indicate that financial strength is an important factor in explaining buyout bankruptcies. Portfolio firms' greater ability to convert EBITDA to free cash flow after capital expenditures, lower indebtedness, higher interest coverage and higher profitability are associated with lower bankruptcy rates. Furthermore industry cyclicality, favourable economic conditions and flex credit market appear to be associated with higher probability of bankruptcy. Also, strength of creditor rights appears to have a very significant effect on the bankruptcy probability.
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