How Non-Banks Increased the Supply of Bank Loans: Evidence from Institutional Term Loans

Abstract

There is considerable evidence that the growth of non-bank institutional investors, primarily collateralized loan obligations, in the market for bank loans provided a significant increase in the supply of credit. Firms accessing the market for institutional term loans invested more in capital expenditures and working capital than otherwise similar firms. Since institutional investors have concentrated in lending to borrowers with speculative-grade debt ratings, the borrower's credit rating provides a natural instrument to show that borrowing from a non-bank has had a causal impact on firm investment. Institutional term loans have permitted borrowers to increase their leverage and strengthen their balance sheets by lengthening the maturity of their debt, further confirming that non-bank investors have increased the supply of credit. In response to the supply shock, there has been considerable growth in number of firms with speculative-grade ratings, driven primarily by firms acquiring new ratings to gain access to the institutional market. This result suggests that banks no longer have a comparative advantage in funding senior, secured debt that requires extensive monitoring of covenants. However, commercial banks remain the unique provider of revolving lines of credit, suggesting that banks comparative advantage rests in the provision of liquidity in the form of lines of credit.