How banks price loans in leveraged buy-outs: an empirical analysis of spreads determinants

This paper investigates which factors determine the pricing of loans in LBOs, using a worldwide sample of 12,673 syndicated loans closed during the 2000-2013 period. We find that spreads and pricing processes differ significantly in market-based versus bank-based financial systems as well as in the U.S. vis-à-vis W.E. In the pre-crisis period borrowers in market-based financial systems face higher spreads (33.59 bps) than those in bank-based financial systems and loans closed in common law countries are associated with higher spreads (50.71 bps) than those closed in civil law countries. During the crisis period only loans in common law legal systems are associated with higher spreads. In line with Carey and Nini’s (2007) findings, we show that U.S. borrowers face higher spreads than W.E. borrowers. We also find that the pricing of loans in LBOs depends mainly on marketability and default factors and that acquired firms with a higher cash flow potential and asset tangibility face lower spreads. Finally, a robust convex relationship between spread and maturity is found for loans in LBOs.