Sponsor Reputation and Capital Structure Dynamics in Leveraged Buyouts.

This article investigates how the reputations of leveraged buyout (LBO) sponsors as borrowers influence the refinancing terms of their portfolio companies. Analyzing 510 U.S. LBOs from 1988 to 2021, the study finds that 67% of refinancing events occur on time—one quarter before existing debt maturity—and generally improve borrowing terms, while early refinancing events are associated with higher leverage, more dividends, and increased borrowing costs. The key measure, SponsorFailure, defined as the proportion of a sponsor's exited deals resulting in bankruptcy or distress within the past two years, is linked to less favorable refinancing terms, including higher loan spreads and reduced likelihood of dividend issuance, particularly during periods of loosening credit conditions. The study shows that lenders adjust loan terms in response to changes in sponsor reputation, accurately pricing the increased risk of default at refinancing, and that these effects are not observed prior to the LBO or among matched non-private equity firms. The findings highlight the importance of sponsor reputation in intermediate financing decisions and suggest implications for LBO capital structure models and portfolio risk management.