Date of Submission
Open Access Senior Thesis
Bachelor of Arts
Given the rise in private equity companies’ dry powder reserves, as well as the increased prevalence of covenant-lite loans pointing to a change in the overall dynamic of leveraged loan dealmaking, this paper aims to determine whether dry powder is a significant determinant of leveraged loan spreads. This paper uses a sample of loan level contract variables, borrower characteristics, and macroeconomic conditions from DealScan, Compustat, Pitchbook, and the Federal Reserve Economic Data. My findings are consistent with the hypothesis that availability of funds, measured in dry powder, is a good determinant of spread. As leveraged loans are a necessary component of leveraged buyouts, when dry powder reserves are high, investor sentiment is positive and the market is friendly to credit investors. This means that bank and nonbank lenders are more likely to capitalize on the active leveraged loan market, which potentially means giving out riskier loans and charging higher premiums for these said loans. Therefore, I hypothesize that dry powder and spread have a positive and significant relationship. These findings were statistically significant when tested during the black swan years in the given sample period, controlling for robust standard errors, and including broad sector fixed effects. Finally, when tested across different tranche types, different characteristics became more significant to spread.
Yu, Raizel, "Round after round: Understanding dry powder as a determinant of spread in leveraged loans" (2022). CMC Senior Theses. 2962.