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How Banks Price Loans for LBOs: an Empirical Analysis of Spread Determinants

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Listed:
  • Paulo P. Alves

    (Católica Porto Business School and CEGE
    Lancaster University Management School)

  • M. Ricardo Cunha

    (Católica Porto Business School and CEGE)

  • Luís K. Pacheco

    (Católica Porto Business School and CEGE)

  • João M. Pinto

    (Católica Porto Business School and CEGE)

Abstract

This paper examines which factors determine the pricing of loans for LBOs, using a worldwide sample of 11,111 loans closed in the 2000–2016 period. Our findings are consistent with the hypotheses that loans for LBOs extended to borrowers in market- versus bank-based financial systems are differently priced, and that law and institutional characteristics are important determinants of spreads for deals closed in market-oriented countries. Despite LBO loan pricing differing significantly in normal versus crisis times, loans extended to borrowers in market-based financial systems have higher spreads than those where banks play a major role. Our results also support the hypothesis of tranching as a mechanism of reducing spreads by completing financial markets and mitigating informational asymmetries. Finally, a robust convex relationship between spread and maturity is found, suggesting higher market competition by banks and investors for standard, medium-term maturities.

Suggested Citation

  • Paulo P. Alves & M. Ricardo Cunha & Luís K. Pacheco & João M. Pinto, 2022. "How Banks Price Loans for LBOs: an Empirical Analysis of Spread Determinants ," Journal of Financial Services Research, Springer;Western Finance Association, vol. 62(3), pages 163-200, December.
    • Handle: RePEc:kap:jfsres:v:62:y:2022:i:3:d:10.1007_s10693-021-00355-y
    DOI: 10.1007/s10693-021-00355-y
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    More about this item

    Keywords

    Loan pricing; LBOs; Financial crisis; Market-based; Term structure of spreads;
    All these keywords.

    JEL classification:

    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • G01 - Financial Economics - - General - - - Financial Crises
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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