I read a passage from a book where they said that e.g. 40% equity contribution in an lbo would serve as a cushion for investors as enterprise value would have to decline by more than 40% before their principal might be jeopardized.

 

Theoretically, that is correct. In practice, the debt will trade lower (yields will increase) as the company's financial health deteriorates. That being said, these are "paper losses" for the debt holders, and if it goes through a bankruptcy the debt could end up trading back at par if only the equity cushion is impaired.

In other words, this is largely a theoretical vs practical application. In general, creditors see having a large equity cushion as a credit positive, but the debt will also move even if the principal isn't technically impaired.

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