This paper examines the relation between the number and type of lenders that participate in corporate loan facilities and the nature of troubled debt restructurings. We find that loans from traditional bank lenders are significantly easier to restructure out of court than loans from institutional lenders. We also find that the existence of a past banking relationship between the borrower and the lead arranger of a syndicated loan adversely affects the ease of restructuring. Finally, we find that reliance on loans that are held in part by collateralized loan obligations (CLOs) is positively related to the likelihood of a prepackaged bankruptcy, consistent with greater holdout problems when loans are held by CLOs. Overall, our findings suggest that the role of banks in the restructuring process is quite different when bank loans are diffusely held or securitized.

This paper investigates whether the reputation of acquiring private equity groups (PEGs) is related to the financing structure of leveraged buyouts (LBOs). Using a sample of 180 public-to-private LBOs in the US between January 1, 1997 and August 15, 2007, we find that reputable PEGs are more active in the LBO market when credit risk spreads are low and lending standards in the credit markets are lax. We also find that reputable PEGs pay narrower bank and institutional loan spreads, have longer loan maturities, and rely more on institutional loans. In addition, while we find that PEG reputation is positively related to buyout leverage (i.e., LBO debt divided by pre-LBO earnings before interest, taxes, and amortization (EBITDA) of the target), and leverage is significantly positively related to buyout pricing, we do not find any direct relation between PEG reputation and buyout valuations. The evidence suggests that PEG reputation is related to LBO financing structure not only because reputable PEGs are more likely to take advantage of market timing in credit markets and but also because PEG reputation reduces agency costs of LBO debt.

Past studies find that commercial loan spreads are “sticky” in the sense that they do not fully respond to changes in open market rates or observable firm credit risk characteristics. In this paper, we provide evidence that the appearance of stickiness arises, in part, because the intensity of bank screening varies inversely with changes in both observable firm credit risk characteristics and credit market conditions. Our analysis demonstrates that stickiness in loan spreads does not necessarily indicate loan mispricing or misallocation of credit.