Abstract

http://ssrn.com/abstract=1017857
 
 

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The Private Equity Advantage: Leveraged Buyout Firms and Relationship Banking


Victoria Ivashina


Harvard University; National Bureau of Economic Research (NBER)

Anna Kovner


Federal Reserve Bank of New York

April 5, 2010

EFA 2008 Athens Meetings Paper

Abstract:     
This paper examines the impact of leveraged buyout firms’ bank relationships on the terms of their syndicated loans. Using a sample of 1,590 loans financing private equity sponsored leveraged buyouts between 1993 and 2005, we find that bank relationships are an important factor in explaining cross-sectional variation in the loan interest rate and covenant structure. Our results indicate that two channels allow leveraged buyouts sponsored by private equity firms to receive favorable loan terms. First, bank relationships formed through repeated interactions reduce inefficiencies from information asymmetry. Second, banks price loans to cross-sell other fee business. These effects are additive. A one standard deviation increase in both bank relationship strength and cross-selling potential is associated with a 17 basis point (5%) decrease in spread and a 0.4 point (7%) increase in the maximum debt to EBITDA covenant. This translates to as much as a 4 percentage point increase in equity return to the leveraged buyout firm.

Number of Pages in PDF File: 60

Keywords: Private equity; leveraged buyouts; bank debt; relationship banking

JEL Classification: G20, G21, G23, G24, G32

working papers series


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Date posted: February 29, 2008 ; Last revised: April 14, 2010

Suggested Citation

Ivashina, Victoria and Kovner, Anna, The Private Equity Advantage: Leveraged Buyout Firms and Relationship Banking (April 5, 2010). EFA 2008 Athens Meetings Paper. Available at SSRN: http://ssrn.com/abstract=1017857 or http://dx.doi.org/10.2139/ssrn.1017857

Contact Information

Victoria Ivashina (Contact Author)
Harvard University ( email )
Harvard Business School
Baker Library 233
Boston, MA 02163
United States
National Bureau of Economic Research (NBER) ( email )
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Anna Kovner
Federal Reserve Bank of New York ( email )
33 Liberty Street
New York, NY 10045
United States
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