The role of strip financing in leveraged buyouts: A theoretical analysis

A particular feature of financing an LBO transaction is the incorporation of strip financing in which each investor takes a strip of senior debt, junior debt, and equity. Junior debtors who hold a simultaneous ownership of equity and debt have an incentive to postpone a bankruptcy providing the present value of the asset liquidation and earnings at the end of the second period exceeds the value of total debt obligation. This possibility of postponing bankruptcy provides the LBO firm with an extra path of operation through which it can achieve an additional value.