Did Structured Credit Fuel the LBO Boom?

62 Pages Posted: 28 Apr 2009

See all articles by Anil Shivdasani

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School

Yihui Wang

Fordham University

Multiple version iconThere are 2 versions of this paper

Date Written: April 24, 2009

Abstract

We demonstrate a link between the twin storms underlying the current financial crisis - the market for collateralized debt obligations (CDOs) and the market for leveraged loans. We show that structural changes in credit markets that led to the explosion in CDOs created an increased supply of bank loans for funding LBOs. This structured lending supported by CDOs led to cheaper credit, looser covenants, and more aggressive use of bank loans in financing LBOs. However, in sharp contrast to the LBO boom in the late 1980s, this easy credit did not lead to riskier LBO deals or deal structures. Our findings point to the effects of disintermediation of banks as they switched from an originate-and-hold to an originate-to-distribute lending model.

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

JEL Classification: G31, G32, G34

Suggested Citation

Shivdasani, Anil and Wang, Yihui, Did Structured Credit Fuel the LBO Boom? (April 24, 2009). Available at SSRN: https://ssrn.com/abstract=1394421 or http://dx.doi.org/10.2139/ssrn.1394421

Anil Shivdasani

University of North Carolina Kenan-Flagler Business School ( email )

Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
919-962-3182 (Phone)
919-962-2068 (Fax)

Yihui Wang (Contact Author)

Fordham University ( email )

33 West 60th Street
New York, NY 10023
United States

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