The Importance of Leveraged Lending: It's (Not) All Academic
20 Pages Posted: 3 Feb 2016
Date Written: January 31, 2016
This paper argues that U.S. bank regulator efforts to restrain leveraged lending are misguided. Leveraged loans are a critical source of external financing for companies in need of cash to invest, innovate, and grow. I review a sizable body of academic evidence that shows that, of the myriad sources of financing available to companies, including funding received through various forms of equity and debt financing, bank lending is unique in that it provides value to borrowers in ways that other funding sources do not. I also argue that regulators are mistaken in their efforts to reduce the funding available for LBOs. Empirical studies of the impact of private equity ownership on firm performance indicate that LBOs are followed by increases in operating performance and value at target firms, and that such increases outpace those at peer firms not backed by private equity groups. Moreover, when private equity-backed firms do become financially distressed, they resolve their distress more quickly and with a higher survival rate than their non-private equity-backed peers.
Keywords: bank regulation, leveraged loans, syndicated loans
JEL Classification: G21, G28, G32, G38
Suggested Citation: Suggested Citation