In order to respond to our research question, we elaborated a set of key inquiries that were sent to the entire sample of 256 PE firms. These specific questions were processed and divided into several sections, taking the final form of a survey.
In particular, the survey we created is split into sections that, in turn, are identified on the basis of seniorities of debt and the different nature of the lender, so as to
0 20 40 60 80 100 120 140 N u m b er o f P E firm s Transaction size
Sample Breakdown (transaction size)
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make it more intelligible for PE firms that were required to fill it out. Hence, the remainder of this paragraph is dedicated to the exploration and review of each section of our survey. In addition to the mere observations, we will also attempt to establish some testable hypotheses that are stemmed from the literature review that we carried out in Part I and II. In particular, such hypotheses relate to the investigation of whether the typical banks’ defensive approach (put in place during every LBO economic cycle) have been maintained after the crisis of 2007. We conjecture that, similarly to both the first and the second LBO boom that took place in the past, the “bust” occurred in 2007 simply started a third, new cycle during which banks have not modified their attitudes after all, though they might have changed financial tools used in the financing package. In light of this, we hypothesize that banks might have increased (at least for the first years after 2007, as it has always happened after a downturn takes place) their commitment to LBOs, despite they might gradually reduce it over years, consistently with this typical defensive approach.
We will report our results in Part IV (see paragraph 4.1), where we will also draw our conclusions on whether banks have changed their attitudes, and possible implications for value creation.
Senior Debt (Banks)
The first section of our survey has the aim of investigating whether banks modified in any way their primary role as debt financiers in LBO transactions after the crisis occurred in 2007. As observed in detail in Part I and Part II, banks indeed have always been the predominant subjects for (arranging and) putting up capital in highly-leveraged transactions, despite the overwhelming surge of institutional investors that entered the market as moneylenders. In other words, in spite of the “defensive approach” that banks had always attempted to put in place on a continuous basis since the 1980s, relevant reductions of the typical banks’ commitment in LBO operations appear somewhat unlikely, especially in the first years after the huge downturn that took place. Hence, we conjecture that the crisis
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might have attenuated the banks’ defensive approach, at least for the first years; therefore, according to us, banks might have even increased their commitment (at least in the first period), as they have always played the most important role in highly-leveraged transactions, despite they might then decrease it afterwards. Consistently, we set up a series of hypotheses to be tested.
H1: The crisis did not affect heavily the predominance and relevance of banks in financing Leveraged Buyout deals, maintaining or even increasing their quota over the total debt.
H2: In the aftermath of the inauspicious effects of the crisis, banks have increased interest rates on leveraged loans they provide to fund LBOs.
In order to test such hypotheses, we included related questions in the survey.
Box 1
Senior long-term debt
1- Has the usage of Term A loans remained stable, diminished or increased? 2- What is the average incidence of Term A loans over the total debt? 3- Have Term A loans become more costly after the financial crisis of 2007? 4- Has the usage of financial covenants varied, becoming more or less restrictive? 5- Has the average maturity of Term A loans varied?
Senior short-term debt
1- Has the usage of short-term facilities remained stable, diminished or increased? 2- What types of short-term facilities do you rely on the most?
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Senior Debt (Institutional Investors)
Strictly related to our first section, the second section of our survey aims at analyzing if, and how, institutional investors that quickly rose and became key actors alongside banks during the 2000s have continued to maintain their leading role even after the 2007 meltdown, or if they backed out (and in this latter case, to what extent). According to our judgement, institutional investors might have strongly lowered their commitment once the crisis occurred, as they realized they simply got a little too exalted in financing highly-leveraged transactions during the antecedent period, so that they finally might have resized their overall commitment.
H3: Institutional investors have substantially lowered their commitment to leveraged buyout transactions after the advent of the financial crisis.
Box 2
Senior long-term debt
1- Has the usage of Term B and C loans remained stable, diminished or increased? 2- What is the average incidence of Term B and C loans over the total debt? 3- What kind of investors are most active in financing LBO deals?
4- Have Term B and C loans become more costly after the financial crisis of 2007? 5- Has the usage of financial covenants varied, becoming more or less restrictive? 6- Has the average maturity of Term A loans varied?
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Junior Debt and other forms of financing
The third section of our survey relates to the usage of junior financial instruments (i.e. second-lien loans, mezzanine capital, high-yield bonds), as well as other less common tools (i.e. sponsor loans and vendor loans), and how the crisis affected their role in financing LBO deals. Given their relatively low relevance even before 2007, we expect these forms of financing not to have modified a lot.
H4: The crisis did not strongly affect the usage of junior debt financing, which have maintained their relatively low percentage over the total debt package, despite having increased their interest rates.
H5: Due to the huge impact of the crisis that might have altered typical ways of financing LBO deals, there have been an increase for non-conventional forms of financing, such as sponsor loans and vendor loans.
Box 3
Junior Debt
1- Has the usage of second-lien loans, mezzanine capital and high-yield bonds remained stable, diminished or increased?
2- What is the average incidence of second-lien loans, mezzanine capital and high-yield bonds over the total debt?
3- Have second-lien loans, mezzanine capital and high-yield bonds become more costly after the financial crisis of 2007?
4- What is the willingness of institutions and the overall public to invest in junior debt instruments?
Box 4
Other Debt
1- Have you ever used a sponsor loan to partly finance your LBO deals? If yes, is this practice more or less used than it used to be before 2007?
2- Have you ever used a vendor loan to partly finance your LBO deals? If yes, is this practice more or less used than it used to be before 2007?
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Derivatives Usage
In the last section of our survey, we inquired about the usage of structured finance products (i.e. ABS and other securitized products) and, above all, credit derivatives (i.e. CDOs, CLOs, CBOs). In particular, we asked PE firms whether they have made use of such sophisticated financial products, also prior to 2007, in order to elaborate a comparison with the post-crisis period with the aim of finally investigating if there was some sort of reorganization and rationalization regarding their use (and abuse).
Since the financial meltdown that occurred in 2007 was reported to be strongly related to the increasing and uncontrolled issuance of such complex financial and credit derivatives (even though not preeminently in the LBO market), we expect a radical restructuring on their overall usage from PE firms and arranging banks.
H6: PE firms and (especially) banks strongly reduced the issuance of structured finance products and credit derivatives as a consequence of the 2007 financial crisis, making use of them in a more reasonable way.
To test this hypothesis, we asked first and foremost whether the interviewee PE firm has ever dealt with, and made use of, credit derivatives in one or more of its LBO deals. If the answer is affirmative, the PE firm is asked to go on to respond to the specific section, otherwise being redirected to the end of the survey.
Box 5
1- Have you recently used ABS securitization on the target's assets to partly finance your LBOs? And how much compared to the pre-2007 period?
2- Have banks on which you rely ever used CLOs to be sold to institutional investors? If yes, is this practice more or less usual than it was before 2007?
3- Have banks on which you rely ever used CBOs to be sold to institutional investors or to the public? If yes, is this practice more or less usual than it was before 2007? 4- Have banks on which you rely ever securitized ABS or other structured products in
what is called a Structured CDO? If yes, is this practice more or less usual than it was before 2007?
5- Have there been any other types of structured finance products or derivatives that have become common in your LBO financing after 2007?
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