Syndicated lending under asymmetric creditor information

Abstract

This paper explores how asymmetric information about borrower quality among syndicated lenders alters the incentive to refinance illiquid borrowers. We use a model in which lenders enter the market sequentially in two rounds of lending. Between the two rounds, a shock separates borrowers into good ones and bad ones, and early entrants acquire information about individual borrower type, while late entrants know only the distribution of borrower types. The asymmetric information structure gives rise to both signalling and screening issues. We show that self-selecting contracts do not exist, and that there is always a pooling Perfect Bayesian Equilibrium in which late entrants lend to both good and bad types, without borrower type being exposed before final clearing at the terminal time. Based on this framework, we argue that prior to the 1982 international debt crisis, it was possible for banks with heavy exposure to troubled debtors to attract rational newcomers in syndicated loans which were, with positive probability, bailout loans.