Do Bank Networks Influence LBO Financing?

Abstract

We investigate whether syndication networks among banks influence the financing of leveraged buyouts (LBO). We find that lead banks serve as important intermediaries between the supply (banks in an LBO loan syndicate) and demand (targets and private equity (PE) firms) sides of LBO financing. They rely on their syndication network to reduce information asymmetries between the parties involved, especially when prior bank-borrower relationships are weak or non-existent. Banks that are more central within their network are more likely to be chosen as lead arrangers since they are able to form larger syndicates and provide more debt. In addition, more central banks are preferred as lead arrangers because their influential network position allows them to finance LBOs under terms that are favorable to both targets and PE firms. After controlling for the simultaneous determination of LBO financing terms, we find that a one-standard-deviation increase in bank centrality reduces LBO loan spreads by an average of 22 basis points, representing a 1.65% increase in PE equity returns for an average loan size of $363 million. These findings suggest that bank networks play a crucial role in facilitating LBO financing and that borrowers are able to perceive the relative position of banks within these syndication networks.