CBR Briefing #54

Apr 02, 2018

Sections Finance

When times are tough, lenders prefer family businesses
Banks viewed family-owned companies as safer investments during the 2007–10 financial crisis

Average credit spreads increased for all companies around the time of the Lehman collapse, but the increase was larger for nonfamily businesses.
  • Family-owned businesses paid significantly less for debt than nonfamily firms when credit was difficult to secure, according to a study of US syndicated loans between 2004 and 2010 by Spyridon Lagaras of the University of Illinois at Urbana-Champaign and Chicago Booth’s Margarita Tsoutsoura.
  • The research focuses on syndicated loans involving Lehman Brothers before its 2008 collapse. It follows the credit-spread changes for the borrowers as they replaced the Lehman component of their debt with new loans or increased debt from other institutions.
  • The researchers find that around the time of the Lehman collapse, average credit spreads increased for all companies, but the increase was larger for nonfamily businesses (see chart). The increase in loan spreads around the Lehman crisis was at least 24 points lower for family firms. Among companies highly exposed to the Lehman collapse, the spreads on loans were at least 73 basis points lower for family firms—a significant difference, given that the mean spread during the crisis was 344 basis points.
  • Family businesses with a family member as CEO received the most-favorable loan rates, according to the researchers, who also find that covenants in 17 percent of the loans to family businesses demanded that the founding family maintain a minimum percentage of ownership or voting power.