Syndicated Bank Loans Research Articles

Loan underpricing and the provision of merger advisory services

This paper investigates the primary and secondary syndicated bank loan market to analyze the effect on pricing when the financial institution commingles syndicated lending with merger advisory services. In particular, we investigate the connection between the acquirer’s choice of financial advisor in a merger and future financing commitments. We find evidence of underpricing of syndicated bank loans in both the primary and secondary market. In the primary market, we show that non-acquisition loans granted by merger advisors to acquiring firms after the merger announcement date are charged a lower all-in-spread relative to acquisition loans if there has been a prior lending relationship. Consistent with this finding, we find that syndicated bank loans for non-acquisition purposes arranged by the acquirer’s advisor after the merger announcement date trade in the secondary market at a significant discount. Since the terms on these non-acquisition loans are not set upon merger announcement, they are most subject to risk shifting and underpricing agency problems. These findings offer evidence consistent with the existence of loss leader and potentially conflicted loans (priced at below-market terms) that are offered by the acquirer’s relationship bank advisor in order to win merger advisory business.

Borrowing Beyond Borders: The Geography and Pricing of Syndicated Bank Loans

We examine the global geography and pricing of the syndicated loan market using a sample of more than 13,000 loan packages issued to 4,713 firms headquartered across 10 countries during the 1998 to 2004 sample period. Our results provide insights into the relative importance of information costs, cross-country differences in legal and regulatory costs, and cross-country competition in bank lending. Consistent with Carey and Nini's (2006) pricing puzzle, we find that, on average, loans to European firms are significantly cheaper than loans to North American firms by approximately 40 basis points. However, we find that the price differences between these markets holds primarily for those firms that do not have complete access to European capital markets. That is, firms headquartered in North America with significant assets or sales in Europe get the European discount by using a European lead lender. At the same time, we find that large firms often pay lower rates when borrowing from a foreign lender. Interestingly, this result holds for both North American firms borrowing in Europe as well as for European firms borrowing in North America. Therefore, it appears that global competition has helped reduce borrowing costs for those firms that have greater access to global lending markets. Our finding that discounting on foreign loans to large firms occurs in a similar fashion in both Europe and North America also suggests that European lenders do not have a persistent competitive or regulatory advantage.

The Informational Efficiency of the Equity Market As Compared to the Syndicated Bank Loan Market

The loan market is a hybrid between a public and a private market, comprised of financial institutions with access to private information about borrowing firms. We test whether this is reflected in informationally efficient price formation in the loan market vis-a-vis the equity markets, and reject this private information hypothesis. We also reject a liquidity hypothesis which suggests that equity markets always lead loan markets, despite bank lenders' access to private information, because of greater liquidity in equity markets. We further test, and reject, an asymmetric price reaction hypothesis that states that loan returns are more sensitive to negative information whereas equity returns respond symmetrically to both positive and negative information. We find evidence most consistent with an integrated markets hypothesis that suggests that both the equity and syndicated bank loan markets are highly integrated such that information flows freely across markets. This is particularly true when the equity market makers are also loan syndicate members.

Equity Compensation and the Pricing of Syndicated Loans

Drawing on theoretical research, I provide empirical evidence on the effect of managerial equity compensation on the pricing and ownership structure of syndicated bank loans. Equity compensation motivates managers to expropriate lenders' wealth and engage in aggressive investment behaviour. I hypothesize that bank syndicates anticipate these managerial actions when negotiating lending agreements and find evidence consistent with my predictions. Managerial equity compensation is associated with larger risk premiums in syndicated loan spreads after controlling for relevant loan and firm characteristics. In addition, loan agreements are structured to facilitate better bank monitoring ex post. Loan contracts require more restrictive covenants and the lead arranging banks retain larger shares in the loans.

The Informational Efficiency of the Equity Market as Compared to the Syndicated Bank Loan Market

To our knowledge, this is the first paper to examine the informational efficiency of the equity market as compared to the syndicated bank loan market. The loan market is a private market comprised of financial institutions with access to private information. We test whether this isreflected in informationally efficient price formation in the loan market vis a vis the equity markets, and reject this private information hypothesis. We find support for a liquidity hypothesis, suggesting that equity markets lead loan markets, despite bank lenders access to private information, because of greater liquidity in equity markets. Only when equity markets arerelatively illiquid do we find evidence supporting the private information hypothesis. Finally, we find evidence of abnormal returns if portfolios are constructed using lagged equity returns todesignate investments in the syndicated bank loan market.

The Determinants and Implications of Bank Lending Distribution Methods: Bilateral versus Syndicated Lending

This paper provides the first empirical study of the effects of demand (firm) and supply (bank) factors of bank lending on the use of lending distribution methods, i.e., bilateral and syndicated lending. The findings have three implications. First, on the demand side, credit quality and information asymmetry are economically important determinants of lending distribution methods, after controlling for firm and loan size. This is consistent with the notion that syndicated bank loan serves as an intermediate form of financing between bilateral loan and public bond. Second, on the supply side, inter-bank competition and geographic deregulation drives banks to be more likely to choose the type of loans in accordance with their lending expertise. Third, inter-bank competition and deregulation lowers the interest rates charged.

The Information Content of Quarterly Earnings in Syndicated Bank Loans Prices

We examine the information content of quarterly earnings announcements in the syndicated bank loan market, a hybrid public/private debt market that is exclusively comprised of informed institutional participants. In contrast to the literature on equity price reactions to earnings announcements, we find that bank loan returns experience no significant response on earnings announcement dates. However, we do find significant price movements in the secondary loan market four weeks prior to earnings announcement dates, around the time of the monthly covenant reports to members of the syndicate. Moreover, we find that the information content in syndicated bank loan prices is most pronounced for borrowers with predominantly intangible assets that experience declining earnings. Thus, we find evidence that when earnings announcements convey relevant information about the borrowing firm (i.e., for informationally opaque firms with declining creditworthiness), the syndicated bank loan market expeditiously incorporates that information into prices.

Conflicts of Interest in Merger Advisory Services

Conflicts of interest in combining lending with the merger advisement of acquiring firms are found using two separate methodologies. First, commercial banks that advise acquirers with which they have had a prior lending relationship experience a significantly negative abnormal return, averaging 37 basis points over the 3-day period surrounding the merger announcement date. Second, syndicated bank loans that are arranged by the acquirer's advisor after the merger announcement date trade at a significant discount in the secondary market, averaging 4.15%, as compared with syndicated bank loans arranged by banks with no advisory role. Moreover, general-purpose syndicated bank loans originated less than one year after the merger announcement date and arranged by the acquiring firm's advisor trade at an average discount of roughly 12% in the secondary loan market. Since the terms on these general-purpose loans are not set upon merger announcement, they are most subject to risk shifting and underpricing agency problems. These findings offer evidence consistent with the existence of conflicted loans (at below market terms) that are offered by the acquirer's commercial bank advisor in order to win merger advisory business.

The Informational Efficiency of the Equity Market as Compared to the Syndicated Bank Loan Market

The Informational Efficiency of the Equity Market as Compared to the Syndicated Bank Loan Market

Sovereign Borrowing by Developing Countries: What Determines Market Access?

What determines the ability of governments from developing countries to access international credit markets? We examine this question using detailed data on sovereign bond issuances and public syndicated bank loans since 1982. We find that traditional measures of a country`s links with the rest of the world (such as trade openness) and traditional liquidity and macroeconomic indicators do not help much in explaining market access. However, a country`s vulnerability to shocks and the perceived quality of its policies and institutions appear to be important determinants of its government`s ability to tap the markets. We are unable to detect strong punishment of defaulting countries by credit markets.

Sovereign Borrowing by Developing Countries: What Determines Market Access?

What determines the ability of governments from developing countries to access international credit markets? We examine this question using detailed data on sovereign bond issuances and public syndicated bank loans since 1982. We find that traditional measures of a country’s links with the rest of the world (such as trade openness) and traditional liquidity and macroeconomic indicators do not help much in explaining market access. However, a country’s vulnerability to shocks and the perceived quality of its policies and institutions appear to be important determinants of its government’s ability to tap the markets. We are unable to detect strong punishment of defaulting countries by credit markets.

Sovereign Debt Restructuring

Since the early 1980's, patterns of emergingmarket finance have changed significantly. Greater integration of capital markets and a trend toward a greater use of direct lending through bonds has led to relatively decreased use of indirect finance through syndicated bank loans. These changes have produced benefits to investors through opportunities for risk diversification and to emerging-market sovereign borrowers by increasing the investor base. The broadened investor base in bond financing, however, raises problems of coordination and collective action in the event of a sovereign borrower's default and restructuring. Now, three parties are involved in determining the debt markdown required to produce solvency: the debtor, creditors, and the global taxpayer through international financial institutions (IFI's). The complex relationships among the borrowers, creditors, and the global taxpayer have made restructuring obligations a costly and time-consuming exercise, especially with the possibility of holdouts. Both the sovereign borrower and its creditors have an incentive to avoid a restructuring in the hope of financial assistance from the global taxpayer. Sovereign governments may not undertake the politically painful steps involved in beginning a restructuring when there is always the hope that official assistance will be forthcoming. Creditors may not accept a reduction in the value of their claims, also in the hope that official assistance will be forthcoming. Costs of postponed and disorderly restructurings are real and substantial. Delays in restructuring can drain a country's resources and increase the ultimate costs of restoring financial sustainability. Creditors bear a burden as well, because the losses associated with the restructuring are reflected in values of

Lending booms, reserves and the sustainability of short-term debt: inferences from the pricing of syndicated bank loans

This paper analyzes the determinants of spreads on syndicated bank lending to emerging markets, treating the loan-extension and pricing decisions as jointly determined. Compared to the bond market, our findings highlight the role of international banks in providing credit to smaller borrowers about whom information is least complete and, more generally, support the interpretation of bank finance as dominating that segment of international financial markets characterized by the most pronounced information asymmetries. Domestic lending booms and low reserves in relation to short-term debt have been priced in the expected manner by international banks. The high level of short-term debt in East Asia was supported by high growth rates but was characterized by a knife-edge quality.

Default rates in the syndicated bank loan market: A mortality analysis

The most fundamental aspect of credit risk models is the rating of the underlying assets and the associated expected and unexpected migration patterns. The most important migration is to default. While default rate empirical studies of corporate bonds are now commonplace, there has never been a study on the default rate in the corporate bank loan market. This paper assesses, for the first time, the default rate experience on large, syndicated bank loans. The results are stratified by original loan rating using a mortality rate framework for the 1991–1996 period. We find that the mortality rates on bank loans are remarkably similar to that of corporate bonds when measured cumulatively over the five-year period after issuance, but loan default rates appear to be considerably higher than bonds for the first two years after issuance. Since loans have an average effective maturity of under two years, this shorter maturity difference is of considerable relevance, especially if confirmed when our database will cover a longer sample period and more actual defaults. We do attempt to estimate the impact and bias on our results of the study's sample period which only covers the recent benign credit cycle in the US. Our results provide important new information for assessing the risk of corporate loans not only for bankers but also mutual fund investors and analysts of structured financial products, credit derivatives and credit insurance.