Did Structured Credit Fuel the LBO Boom?

Abstract

The leveraged buyout (LBO) boom of 2004-2007 was fueled by growth in collaterialized debt obligations (CDOs) and other forms of securitization. Banks that were active in structured credit underwriting lent more for LBOs, indicating that bank lending policies linked the LBO and CDO markets. LBO loans originated by large CDO underwriters were associated with lower spreads, weaker covenants, and greater use of bank debt in deal financing. Loans financed through the structured credit market did not lead to worse LBO deals, overpayment, or riskier deal structures. Our findings suggest that securitization markets altered banks’ access to capital and affected their lending policies and offer an explanation for the recent LBO boom.

Keywords: credit supply, leveraged buyout, collateralized debt obligation, loan sales, bank monitoring

JEL Classification: G31, G32, G34