Syndicated Loan Market Research Articles

Do CSR Ratings Affect Loan Spreads? Evidence from European Syndicated Loan Market

We investigate whether corporate social responsibility (CSR) ratings affect the syndicated loan spreads paid by European listed firms. By performing ordinary least squares (OLS) pooled regressions on a sample of 1101 syndicated loans granted to European companies, we find evidence that borrowers’ CSR ratings have a significant impact on loan spreads. However, the relationship between CSR ratings and loan spreads is quite complex. Low CSR-rated firms pay higher loan spreads than better CSR-rated firms, but high CSR ratings are not always rewarded by lenders. The benefits of a high CSR rating level are significant only for firms located in countries that pay great attention to sustainability issues. Overall, our work provides a key to reconciling the mixed results obtained in the empirical literature, as we find evidence of a significant lack of homogeneity within the European Union countries regarding the relationship between CSR performance and the cost of debt financing.

BENIGN NEGLECT OF COVENANT VIOLATIONS: BLISSFUL BANKING OR IGNORANT MONITORING?

Theoretically, bank's loan monitoring activity hinges critically on its capitalization. To proxy for monitoring intensity, we use changes in borrowers' investment following loan covenant violations, when creditors can intervene in the governance of the firm. Exploiting granular bank‐firm relationships observed in the syndicated loan market, we document substantial heterogeneity in monitoring across banks and through time. Better capitalized banks are more lenient monitors that intervene less with covenant violators. Importantly, this hands‐off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience, regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks. (JEL G21, G32, G33, G34)

Unconventional monetary policy and bank risk taking

We analyze the presence of bank risk taking associated with unconventional monetary policy in the United States between 2008 and 2015 using corporate syndicated loan data at the bank-firm level. We measure monetary policy using the identification-through-heteroskedasticity approach with a VAR model. To identify the risk-taking channel we control for time-varying heterogeneity in credit demand and supply. Our results indicate that accommodating monetary conditions are associated with overall lower loan spreads. However, the spread reduction is lower for riskier firms, suggesting that there is no risk taking behavior in the syndicated loan market during the UMP period.

Nonbank Lending and Credit Cyclicality

We document three facts about nonbank lending in the syndicated loan market. First, nonbank lending is more than twice as cyclical as bank lending. Second, declines in nonbank lending explain most of the declines in syndicated lending during the Great Recession and COVID-19 crisis. Third, cyclicality in nonbank lending is matched by cyclicality in nonbank funding flows. The higher nonbank cyclicality is not explained by either the health or monitoring ability of banks, nor by bank-borrower relationships. Instead, it appears to be driven by nonbank funding instability. We highlight frictions in CLOs and mutual funds that contribute to this instability.

Identifying the risk-Taking channel of monetary transmission and the connection to economic activity

Abstract I use loan-level data from the syndicated loan market in the U.S. to investigate how monetary policy affects banks’ sensitivity to risk. Using loan-level data and banks’ sensitivity to risk enables me to identify the risk-taking channel and disentangle it from other monetary channels. I show that banks change their behavior toward risk following changes in monetary policy where loose monetary policy reduces banks’ sensitivity to risk. I then provide evidence for the significant contribution of risk-taking shocks and changes in banks’ risk-taking behavior to economic outcomes and business cycle fluctuations. The paper’s primary contribution is in providing new loan-level evidence for the existence of the risk-taking channel in the U.S., as well as a possible link between the risk-taking channel and business cycle fluctuations.

GSIB Status and Corporate Lending: An International Analysis

After the global financial crisis, the Financial Stability Board (FSB) began designating some financial institutions as “Global Systemically Important Banks (GSIBs)”. Because GSIB status implies additional regulatory scrutiny and higher capital requirements we examine the impact of a bank’s GSIB designation on its lending behavior and implications for the real economy. We find the announcement of a bank’s GSIB status to reduce credit supply in the syndicated loan market and the lending cut to primarily affect risky corporate borrowers. These borrowers subsequently experience lower asset-, investment- and sales growth, compared to similar firms borrowing from non-GSIB banks, suggesting that they are unable to substitute to other external finance providers.

Who Lends Before Banking Crises? Evidence from the International Syndicated Loan Market

We show that foreign lenders and low market share lenders extend more credit in comparison to other lenders during lending booms leading to banking crises, but not during other credit expansions. Less established lenders also increase the amount of credit they extend to riskier borrowers, without asking for collateral or imposing covenants and higher interest rates. Our results suggest that taking lenders' characteristics into account could provide an indicator for how much risk an economy is accumulating and be a useful barometer for macroprudential policies.

Lenders’ Culture and the Pricing of US Public Corruption in Corporate Loans

We investigate how the cultural heritage of the CEOs of banks acting as lead lenders in the US syndicated loan market shapes the relationship between public corruption and the cost of bank loans. We find strong evidence that banks led by CEOs originating from higher uncertainty avoidance societies penalize less sharply, in terms of the cost of bank loans, the presence of high local public corruption in the state of the borrowing firms. We find some similar evidence for banks led by CEOs that trace their origins to more individualistic societies. These results are robust to several tests that address concerns such as the matching between borrowing firms from states with high corruption and the cultural heritage of bank CEOs, omitted variable issues, endogeneity, and after controlling for several CEO and bank characteristics. These findings are consistent with the view that certain cultural heritage traits prompt tolerance for the risks of corruption and show that the pricing of institutional quality in corporate loans is conditional on banks led by CEOs with such traits.

Management Issues in Loan Syndications Banking

This article covers the key management issues in the loan syndications banking business. A syndicated loan is provided to a borrower by a group of commercial or investment banks. The global syndicated loan market is from one perspective, the primary funding source for corporations and on the other — one of the leading businesses for the global banks. There exist some unique challenges that must be responded by banks from a managerial and strategic perspective to establish and maintain leadership in the important business due to the features, structures, and industrial organisation of the market. We first consider how the loan syndications business is structured in a global bank, its functions and competitive advantages. Then we discuss the ways banks can implement an effective strategy and maintain leadership and growth in the market. Finally, we propose solutions to dealing with commoditization in banking: (i) adding more value-added services to the client offering; (ii) bundling of services in order to realize cross-selling opportunities and maximize share-of-wallet; (iii) further segmentation and customization of the client base (by industry/relationship/services consumption). By adopting these strategies, banks can successfully fight the commoditization magnet and increase the profitability of their loans syndications businesses.

Implementing Smart Contracts in the Syndicated Loan Market: An Issue of Adoption

Distributed ledger technology allows for data to be recorded, shared, and synchronized across multiple distributed data stores. This brought forth the idea of using this technology to build consensus. Implementing this technology within the Syndicated Loan Market through Smart Contracts allows for reduced manual labor and back-office workloads as well as the removal of reconciliation and corporate actions. As a result, counterparty risk and settlement times will be minimized, and performance and transparency for regular reporting will increase. However, an individual's embrace of this new technology will determine its successful implementation. To address this issue, this article examines the trust model, trust in technology drivers, and the revised unified theory of acceptance and use of the technology model to construct the trust and adoption of the technology model. This article culminates in guidelines for the implementation of Smart Contracts. Avenues for future work include the investigation of a multimotive information systems acceptance model.

Bank Branching Deregulation and the Syndicated Loan Market

How do changes in banking regulation affect the syndicated loan market? Because branch networks and loan syndication both enable banks to diversify geographical credit risk, we investigate the staggered implementation of the Riegle–Neal Interstate Branching and Banking Efficiency Act of 1994. Exploiting that the act only changed the legal framework for out-of-state commercial banks, we find that branching deregulation decreased syndicated loan issuance but spurred bilateral lending to corporations. Consistent with a supply-driven substitution effect, this shift is also reflected in interest rate spreads. Our results suggest that changes to banking regulation can substantially alter credit allocation across loan types.

IRS Tax Enforcement and the Cost of Syndicated Loans in the United States

We show that tax enforcement benefits US firms that borrow from banks. Using data on syndicated loans over the 1993-2017 period, we find that higher IRS audit probabilities exert a negative and significant effect on the cost of loans. The baseline estimates show that a one standard deviation increase in the IRS audit probability decreases the cost of bank credit by around 9 basis points (or $1.55 million interest for the average loan). In further analysis we find that the negative effect of IRS tax enforcement on the cost of syndicated loans is more evident when the presence of external monitors, other than the IRS, is weaker and for loans issued by lead banks that are less reputed and less experienced with borrowing firms and their sector or region. IRS tax enforcement decreases also the probability that loans will contain covenants. The results are robust to several tests that address endogeneity and other concerns. These findings indicate that banks perceive the IRS as a useful external monitoring mechanism that alleviates information asymmetry in the syndicated loan market. This study informs the public policy debate about the IRS by showing that it exerts a positive spillover to the US economy in the form of lower costs of corporate financing through the banking system.

Tranching in the syndicated loan market around the world

Loan tranching allows banks to manage risk and facilitate firm financing, which may be essential for firms that cannot access investors from stock markets. We analyze the determinants and benefits of loan tranching by pooling the tranches of individual loans to create the largest cross-country sample of syndicated loans, covering more than 150,000 loans from multinational and domestic firms. We find that, in addition to market, deal, and borrower characteristics, legal and institutional differences impact loan tranching. Strong creditor protection and efficient debt collection increase the probability of tranching and reduce tranche spreads, ultimately promoting firms’ access to debt. We also find evidence that tranching facilitates the financing of multinational firms abroad due to the transfer of legal and cultural institutions to foreign subsidiaries. Overall, our results suggest that tranching plays an important role in reducing a country’s financial development gap and promotes firms’ access to debt.

How do lead banks use their private information about loan quality in the syndicated loan market?

We formulate and test hypotheses about how lead banks of syndicated loans use private information about loan quality, the Signaling and Sophisticated Syndicate Hypotheses. We measure private information using Shared National Credit (SNC) internal loan ratings made comparable using concordance tables. As outcomes, we use proportions of loans retained by lead banks from SNC and rate spreads on the loans from DealScan. We find favorable private information is associated with higher retention and lower spreads for pure term loans, supporting the Signaling Hypothesis. Only lower spreads occur for pure revolvers, likely because their syndicates more often include large sophisticated banks.

Institutional investors and loan dynamics: Evidence from loan renegotiations

We examine the probability of exit for different types of investors in the syndicated loan market, as well as how the entry and exit of different types of investors is associated with changes in loan characteristics. Nonbanks, particularly CLOs, closed-end funds, and mutual funds, are more likely than bank lenders to exit the syndicate rather than to participate in the renegotiated loan. For mutual funds, greater net fund outflows imply a greater likelihood of exit, and this finding is consistent with nonbank lending creating greater systemic risk (Stein 2013). For most nonbanks, the likelihood of an exit increases if the financial condition of the borrower improves and the potential for higher spreads wanes. Controlling for borrower risk, the addition of most nonbank institutions, in contrast to banks, is accompanied by an increase in loan spreads, but no significant increase in the number or tightness of covenants.

Risk Taking and Low Longer-Term Interest Rates: Evidence from the U.S. Syndicated Loan Market

We use supervisory data to investigate risk taking in the U.S. syndicated loan market at a time when longer-term interest rates are exceptionally low, and we study the ex-ante credit risk of loans acquired by different types of lenders, including banks and shadow banks. We find that insurance companies, pension funds, and, in particular, structured-finance vehicles take higher credit risk when investors expect interest rates to remain low. Banks originate riskier loans that they tend to divest shortly after origination, thus appearing to accommodate other lenders' investment choices. These results are consistent with a search for yield by certain types of shadow banks and, to the extent that Federal Reserve policies affected longer-term rates, the results are also consistent with the presence of a risk-taking channel of monetary policy. Finally, we find that longer-term interest rates have only a modest effect on loan spreads.

Development costs capitalization and debt financing

AbstractThis study investigates debt market effects of research and development (R&D) costs capitalization, using a global sample of public bonds and private syndicated loans issued by public non‐financial firms. Firstly, we show that firms capitalize larger amounts of R&D in a year when they exhibit a propensity for issuing bonds, rather than borrowing funds privately from the syndicated loan market, in the subsequent year. Secondly, we provide evidence that capitalized R&D investments reduce the cost of debt. We infer that debt market participants are able to identify firms’ motives for R&D capitalization, as we find a reduction in the cost of debt only for those firms that do not show indications of employing R&D capitalization for earnings management reasons. Indeed, only for this sub‐sample of firms, the amount of capitalized R&D contributes positively to future earnings. We confirm that R&D capitalization is positively associated with audit fees and thus can be deemed to be a signaling device. Lastly, we find that it is the amount of R&D a firm is expected to capitalize and not the discretionary counterparts, which facilitates a firm's access to public debt markets, reduces bond and syndicated loan prices, and contributes to future benefits.

Benign Neglect of Covenant Violations: Blissful Banking or Ignorant Monitoring?

Theoretically, bank's loan monitoring activity hinges critically on its capitalization. To proxy for monitoring intensity, we use changes in borrowers' investment following loan covenant violations, when creditors can intervene in the governance of the fi rm. Exploiting granular bank-fi rm relationships observed in the syndicated loan market, we document substantial heterogeneity in monitoring across banks and through time. Better capitalized banks are more lenient monitors that intervene less with covenant violators. Importantly, this hands-off approach is associated with improved borrowers' performance. Beyond enhancing financial resilience, regulation that requires banks to hold more capital may thus also mitigate the tightening of credit terms when firms experience shocks.

ECB Corporate QE and the Loan Supply to Bank-Dependent Firms

Using a representative sample of businesses in the euro area, we show that Eurosystempurchases of corporate bonds under the Corporate Sector Purchase programme (CSPP)increased the net issuance of debt securities, triggering a shift in bank loan supply infavour of firms that do not have access to bond-based financing. Identification comes frommatching bank-dependent firms to their lenders and accounting for the effect of CSPPon banks’ activity in the syndicated loan market. In a difference-in-differences setting,we show that credit access improved relatively more for firms borrowing from banksrelatively more exposed to CSPP-eligible firms. Unlike in previous studies, this resultapplies regardless of bank balance sheet quality as measured by Tier 1 and NPL ratios. JEL Classification: E52, E58, G01, G21, G28

Lending Along the Supply Chain

Despite the fact that economic interconnections among firms are very common, there is little research that examines the equilibrium outcome of such interconnections in credit markets. We examine how supply chain interconnections among borrowers within a lender’s loan portfolio affect equilibrium loan spread and lead arranger share in the syndicated loan market. We find that both loan spread and lead arranger share are significantly lower when the lead arranger has a pre-existing loan with the borrower’s major customer. This finding suggests that such “supply chain loans” ease syndicate participants’ moral hazard concerns more than they exacerbate concerns about adverse selection. We further document that these effects are stronger where syndicate participants’ information asymmetry concerns are more pronounced. Consistent with supply chain loans providing benefits to both the borrower and lead arranger, we provide evidence that a borrower is more likely to obtain a loan from a lender who already has an existing loan with its key customer. Our findings provide insights into the mechanisms through which supply chain interdependencies, and more generally, economic relationships, affect debt markets.