eThesis - Kauppakorkeakoulun sähköiset gradut

OBJECTIVES OF THE STUDY:

In this paper I investigate the relation between the financing terms and chosen financing structure in leveraged transactions and the reputation of the sponsoring private equity company ("private equity company" or "sponsor"). More specifically, I examine whether the reputation of the owner facilitates the issuing company in getting favorable terms for their debt financing, which could encourage the reputable private equity sponsors to choose the bond product when financing their portfolio companies. In addition, I examine whether reputable private equity companies rely less on traditional bank loans and use more institutional financing, which could indicate that owner reputation replaces the role of bank monitoring.

High yield bond financing is a relatively young form of financing in Europe which might explain the lack of previous literature in the area, despite the recent growth of high yield bond volumes and the emergence of record-low yields and borrower-friendly transaction structures. I contribute to existing research by investigating high yield bonds and owner reputation in connection with private equity sponsored transactions and more specifically by using a novel data set of European high yield bonds and leveraged loans.

DATA AND METHODOLOGY:

The data set in this paper consists of European high yield bonds between 2006-2014, US high yield bonds between 2000-2014 and European and US traditional bank loan ("term loan A" or "TLA") and institutional loan ("term loan B" or "TLB") transactions between 2000-2014. I collect the price, maturity, credit rating and owner data for the transactions. Measures of bank lending standards, spread between corporate credit indices, equity index returns and high yield fund flows are also included in the data set. I compute six reputation measures based on the number and volume of transactions the private equity companies have done during different time periods. I test the hypotheses with several OLS regressions including different combinations of reputation measures and regression specifications.

FINDINGS OF THE STUDY:

The results support the hypotheses that portfolio companies owned by reputable sponsors get better terms for their debt financing and can rely less on traditional bank loans and use more institutional financing. For example, being one of the top 25 private equity companies based on the volume of transactions lowers the coupon of the bond up to 75 basis points. Bond maturities are significantly positively related to reputation and the impact is up to 15 months longer maturity when calculated by one standard deviation increase in one of my measures for reputation, the natural logarithm of (1 + the number of debt transactions by the private equity company in the prior 36 months).

I find similar results with term loan A and B data, with the spread decreasing impact of reputation being strongest in US TLB loans. For example, if the sponsor is one of the top 25 private equity companies in the US based on the number or volume of transactions, it gets around 50 bps lower spread for the TLB loan, which translates into around 15% price discount on the average BB/BB- rated institutional loan spread in 2014. The results also show that one percentage point increase in the market share of the sponsor, which is one of my reputation measures, decreases the share of the TLA tranche by more than 23% and increases the TLB share by around 13% in transactions in Europe.