Pricing and momentum of syndicated credit in Europe

Abstract

We investigate the determinants of syndicated loan prices for European borrowers, spanning the entire period of credit expansion and crisis. We construct a large data base consisting of 2102 rated syndicated loan deals from 1990 to 2008 in twenty three countries and ten economic sectors. We investigate the effects on the spread paid over the risk free rate of three major groups of factors: loan characteristics, borrower characteristics and characteristics of country of the borrower, using both qualitative and quantitative variables in a hedonic regression. The results show that all three groups are significant joint determinants of prices of syndicated credit. Our results confirm the existing literature but also provide for first time results stemming form the risk characteristics of the borrower and the country of the borrower. It is shown that distance-to-default as well as aggregate risk associated with country of the borrower are of great concern to the lenders and hence significantly affect the pricing of syndicated loans. Furthermore, we report that financial institutions and public utilities are able to negotiate for cheaper loans, but this result is reversed when financing is for acquisition purposes. Overall, risk, liquidity, solvency and sustainable performance by both the borrower and its domicile country are key determinants of syndicated loan prices.