Private Equity Sponsors, Law Firm Relationships, and Loan Contracts in Leveraged Buyouts
Working Paper Author/Authors
Key Finding
A private equity sponsor's relationship with the law firm that advises banks leads to weakened creditor protection in LBOs
Abstract
We study how private equity (PE) sponsors influence loan contracting through their relationships with banks’ legal counsel ("lender law firms") in leveraged buyouts. Stronger PE–lender law firm relationships are associated with fewer loan covenants, a result robust to instrumenting the relationship with sponsor–law firm geographic distance and a quasi-natural experiment. Loans involving relationship lender law firms also feature higher interest spreads and default rates, and lead banks using a sponsor's relationship law firm are more likely to join the syndicate of the sponsor's next deal. These findings point to a potential conflict of interest that weakens creditor protection.
© Ruiyuan (Ryan) Chen, Douglas Cumming, Binru Zhao, Yijia (Eddie) Zhao, 2024
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