The Impact of Arrangers and Buyout Sponsors on Loan Pricing in Leverage Buyouts: A Cross Border Study of US and European Leverage Buyouts

Abstract

This paper assesses the impact of arrangers and buyout sponsors on all in drawn spreads (AIS) for LBOs in the U.S. and European markets. We find that the ability of arrangers and sponsors to complete LBO transactions depends on the additional information that each contains and this plays an important role in corporate loan pricing. We find the presence of buyout sponsors results in higher AIS spreads primarily because buyout sponsors are associated with relatively larger LBO transactions which are more complex and inherently riskier. Buyout sponsors serve as a complement to single arrangers is the LBO market as they help them complete larger and more complicated deals. On the otherhand buyout sponsors are negatively related to club deals and borrowers seek to protect their ownership structure. We also find the lender to borrower relationship associated with single arrangers and multiple providers result in reduced agency cost and greater monitoring such that the AIS spread is smaller. Multiple arranger loans are larger in size with higher risk characteristics. In addition, using a unique and large dataset on syndicated loans, we find that loan pricing has a home bias such that domestic lenders are able to extract higher AIS spreads, while foreign lenders when penetrating internationals market result in lower AIS spreads.

Keywords: LBOs, Private equity, sponsorship, syndicated lending