Did Structured Credit Fuel The LBO Boom?

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Executive Summary

The authors demonstrate a link between the twin storms underlying the current financial crisis - the market for Collateralized Debt Obligations (CDOs) and the market for leveraged loans. The authors show that structural changes in credit markets that led to the explosion in CDOs created an increased supply of bank loans for funding LBOs. This structured lending supported by CDOs led to cheaper credit, looser covenants, and more aggressive use of bank loans in financing LBOs. However, in sharp contrast to the LBO boom in the late 1980s, this easy credit did not lead to riskier LBO deals or deal structures.

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