Did Structured Credit Fuel the LBO Boom?




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    • Shivdasani is at Kenan-Flagler Business School, University of North Carolina at Chapel Hill. Wang is at the Department of Finance, Chinese University of Hong Kong. We thank two anonymous referees, an associate editor, Greg Brown, Sudipto Dasgupta, John Graham (Editor), Cam Harvey, Matthias Kahl, Wayne Landsman, Micah Officer, Paige Ouimet, Chris Parsons, Adam Reed, Jay Ritter, Steffen Sascha, Ed Van Wesep, and seminar participants at the 2010 American Finance Association meeting in Atlanta, the 2010 China International Conference in Finance meeting in Beijing, the 2010 European Finance Association meeting in Frankfurt, American University, Australia National University Summer Finance Camp 2009, Chinese University of Hong Kong, City University of Hong Kong, Hong Kong Baptist University, Nanyang Technological University, Southern Methodist University, Texas Christian University, Tsinghua University, University of Florida, University of North Carolina, University of Oregon, and University of Wisconsin at Madison for helpful comments. We thank Chris Flanagan and Kedran Panageas of JP Morgan and Marc Auerbach and William Chew of S&P for helpful discussions. We thank Asset-Backed Alert for sharing their data and updating the sample to include recent deals. An earlier version of this paper was titled “Does Credit Supply Drive the LBO Market?.”


The leveraged buyout (LBO) boom of 2004 to 2007 was fueled by growth in collateralized debt obligations (CDOs) and other forms of securitization. Banks active in structured credit underwriting lent more for LBOs, indicating that bank lending policies linked LBO and CDO markets. LBO loans originated by large CDO underwriters were associated with lower spreads, weaker covenants, and greater use of bank debt in deal financing. Loans financed through structured credit markets did not lead to worse LBOs, overpayment, or riskier deal structures. Securitization markets altered banks' access to capital, affected their lending policies, and fueled the recent LBO boom.