Levering buyouts in a credit crunch A study of the size, structure and pricing of loans on the Nordic LBO market 2005 - 2008

Abstract

The U.S. subprime crisis in July 2007 caused worldwide financial turbulence and turned several financial markets illiquid. These problems have affected the banks’ willingness and ability to lend money to leveraged buyouts (LBO). The motivation for this thesis is to see how the problems in the financial markets have affected the Nordic LBO market between 2005- 2008 by describing the development of banks’ lending to LBOs in terms of size, structure and pricing. The development is described both through quantitative and qualitative data. The results from interviews with both Nordic and foreign banks have been the main data used for the result, analysis, and conclusion. To summarize the results: Since the credit crunch in July 2007, the prices of the loans have increased, the size of the loans has become smaller, and the structure of the loans has changed significantly. The reasons for these changes are mainly that the macro environment has changed and that the competition, from both banks and institutions such as hedge funds, has decreased. The conclusion that can be drawn based on the result is that the size, structure and pricing of the loans to LBOs are sounder today. The development of the LBO market seen in 2006-2007 could not persist in the long run, hence the bubble finally burst. Syndicating loans are nowadays an embedded part of the LBO process and its liquidity is vital for the LBO industry. In our study, we have also noticed a great influence from market forces on banks’ lending to LBOs, to a greater extent than what banks are willing to admit.