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The Determinants of Leverage Ratios and Loan Spreads in European Leveraged Buyouts

Marttinen, Juuso (2020)

 
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The Determinants of Leverage Ratios and Loan Spreads in European Leveraged Buyouts (1.259Mb)
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Kokoteksti luettavissa vain Tritonian asiakaskoneilla.
Marttinen, Juuso
2020
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Julkaisun pysyvä osoite on
https://urn.fi/URN:NBN:fi-fe2020042221111
Tiivistelmä
The purpose of this thesis is to investigate how leverage ratios and loan spreads are
determined in European leveraged buyout (LBO) transactions. Due to the nature of
LBOs, the high amount of debt capital that is involved in the transaction greatly affects
the financial flexibility of a target company. Although existing literature offers various
explanations for the drivers of leverage ratios and loan pricing, the findings are
contradicting and cannot be entirely interpreted to the recent surge of European LBOs.
Thus, it is crucial to understand and identify the underlying determinants of capital
structures and loan spreads in the overheating leveraged loan market. The data for European LBO transactions stems from early 2011 to mid-2018, covering the recent surge of LBO activity with 123 transactions and 253 loan tranches across 19 countries. OLS regressions are used as a methodology for conducting the research on
leverage ratios and loan spreads, with a set of explanatory variables to control for
company and loan characteristics, as well as the debt market conditions. The findings of the study show that leverage ratios are not determined by the classical
capital structure determinants nor the debt market conditions. Rather, in line with the
trade-off theory, the profitability of a target company drives the capital structure
decision. Additionally, more experienced and reputed private equity sponsors use more
leverage to finance transactions. The results also confirm that institutional loans and
covenant lite loans have pushed leverage ratios higher. On the other hand, loan spreads
are determined by the target company size and prevailing debt market conditions. The
effect of economy-wide changes in the debt markets is greater for bank loans than for
institutional loans. More interestingly, the evidence shows that higher leverage levels
are associated with cheaper debt. Finally, loan terms play a crucial role in determining
the cost of debt. Target companies are able to reduce their lending costs by issuing larger
debt amounts whereas longer maturities are compensated with higher spreads.
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