Syndicated Loan Market Research Articles

The Countercyclical Capital Buffer and the Composition of Bank Lending

Do targeted macroprudential measures impact non-targeted sectors too? We answer this question by investigating the compositional changes in the supply of credit by Swiss banks, exploiting their differential exposure to the activation in 2013 of the countercyclical capital buffer (CCyB) which targeted banks’ exposure to residential mortgages. We find that the additional capital requirements stemming from the activation of the CCyB causes higher growth in banks’ commercial lending. While banks lend more to all categories of firms, including larger corporate borrowers in the syndicated loan market, smaller and riskier firms are the primary beneficiaries of the new macroprudential measure. However, the interest rates and other costs of obtaining credit for these firms increase as well.

Regulatory Arbitrage and Cross-Border Syndicated Loans

This paper investigates how international regulatory and institutional differences affect lending in the cross-border syndicated loan market. Lending provided through a foreign subsidiary is subject to subsidiary-country regulation and institutional arrangements. Multinational banks’ choices between loan origination through the parent bank or through a foreign subsidiary provide information about these banks’ preferences to operate in countries with varying regulations and institutions. Our results indicate that international banks have a tendency to switch loan origination towards countries with less stringent bank regulation and supervision consistent with regulatory arbitrage, but that they prefer to originate loans in countries with higher-quality institutions related to financial market monitoring, creditor rights, and the speed of contract enforcement.

The U.S. Syndicated Loan Market: Matching Data

We introduce a new software package for determining linkages between datasets without common identifiers. We apply these methods to three datasets commonly used in academic research on syndicated lending: Refinitiv LPC DealScan, the Shared National Credit Database, and S&P Global Market Intelligence Compustat. We benchmark the results of our match using results from the literature and previously matched files that are publicly available. We find that the company level matching is enhanced by careful cleaning of the data and considering hierarchical relationships. For loan level matching, a tailored approach based on a good understanding of the data can be better in certain dimensions than a more pure machine learning approach. The R package for the company level match can be found on Github at https://github.com/seunglee98/fedmatch.

Lending Corruption and Bank Loan Contracting: Cross-Country Evidence

Lending corruption is an important agency problem for banks. Using data from the World Bank Business Environmental Survey, we find that in countries with more lending corruption, banks give more favorable loan terms to borrowers. This relation is stronger when firms are under more financing constraints, consistent with corruption being important to obtaining favorable loan terms when the supply of debt capital is tighter. In line with the expectation that monitoring constrains agency problems, this relation is weaker in countries with higher foreign ownership of banks or where Protestantism is the primary religion. In the syndicated loan market, participant banks are inclined to lend less in countries where lending corruption is more prevalent. Firms in countries with greater corruption prefer private bank debt over public bonds and are more leveraged. Banks in countries with more lending corruption have poor loan quality, worse earnings performance, and are more susceptible to trouble during a financial crisis. Overall, our findings suggest that corruption greases the wheels for borrowers but is detrimental to bank shareholders.

The U.S. Syndicated Loan Market: Matching Data

We introduce a new software package for determining linkages between datasets without common identifiers. We apply these methods to three datasets commonly used in academic research on syndicated lending: Refinitiv LPC DealScan, the Shared National Credit Database, and S&P Global Market Intelligence Compustat. We benchmark the results of our match using results from the literature and previously matched files that are publicly available. We find that the company level matching is enhanced by careful cleaning of the data and considering hierarchical relationships. For loan level matching, a tailored approach based on a good understanding of the data can be better in certain dimensions than a more pure machine learning approach. The R package for the company level match can be found on Github.

Bank Specialness, Credit Lines, and Loan Structure

We find that credit lines (CLs) play special roles in syndicated lending, committing lead banks to screen, monitor, and invest in relationships with borrowers. Institutional term loans (ITLs) packaged with CLs have lower interest rate spreads in the primary market and narrower bid-ask spreads in the secondary market. Findings support the Bank Specialness Hypothesis that banks significantly alleviate information problems in the syndicated loan market. Additional tests using the Lehman bankruptcy as a quasi-natural experiment confirm our conclusions. Our tests extend the literature on bank specialness, the value of CLs, and optimal loan contracting. Our findings also have policy implications.

Negotiation and the Clustering of Corporate Loan Spreads

Most corporate loans are priced at rounded spreads, e.g. spreads that are a multiple of 25 basis points. Using a sample of 16,598 loan tranches signed by US borrowers between January 1988 and December 2010, this study explores the determinants of such interest rate clustering in the corporate syndicated loan market. We postulate that lead arrangers round spreads upwards because of the uncertainty about the riskiness of the borrowers. Consistent with this negotiation hypothesis, we find that clustering increases with the degree of uncertainty, e.g. the degree of information asymmetry between the lead arranger and the borrower. In contrast, clustering is less likely when lead arrangers have acquired information about the borrower through prior interactions. Finally, the fear of reputation loss incentivizes the most reputable lead arrangers to price loans at more competitive non-rounded spreads.

Loan Syndication Structures and Price Collusion

How does the organizational form of loan syndicates evolve and what are the effects on price collusion? We develop a novel measure of distance in lending expertise among syndicate lenders, and relate this novel measure to the organizational form of loan syndicates and loan pricing. Studying the U.S. syndicated loan market from 1989 to 2017, we find that the organizational form of loan syndicates significantly varies across our lender measure based on similar specializations in lending which we call syndicated distance. Large lead arrangers prefer to form close and concentrated syndicates by letting lenders with similar lending expertise into their syndicates and allocating those lenders higher loan shares. Analyzing loan pricing, we find that concentrated syndicates possess improved screening abilities, but collude on loan pricing. Consistent with Hatfield et al. (2017), we find however that price collusion of concentrated syndicates only occurs during periods of low market concentration. Our findings imply that both the organizational form of loan syndicates and the level of market concentration affect price collusion.

Is Tax Volatility Priced by Lenders in the Syndicated Loan Market?

In this study, I consider the effects of tax risk from tax volatility on the pricing of syndicated debt. Tax volatility is an interesting feature in that managers have some discretion over the risks they take with their tax strategies, which, however, are often harder to monitor for outsiders than risks related to other business activities. Framing my predictions based on the theoretical model developed by Merton [1974], I hypothesize and find that tax volatility is incrementally informative to other priced risks suggesting that tax risks per se are relevant to lenders. Moreover, I find that the results are stronger when the loan contract does not include performance pricing provisions or other restrictions, such as capital expenditure covenants, that protect lenders. This evidence adds to knowledge about the real effects of tax risk.

A new approach to financial integration and market income inequality

Using loan contracts of firms in the syndicated loan market, we generate weighted aggregate measures of financial connections of emerging market economies and relate these financial integration indices to income inequality. The results reveal that financial integration is beneficial in reducing market income inequality, but worsens net income inequality. Financial intermediation is detrimental to net income inequality, but beneficial in lowering market income inequality. The results show that independent access to financing has no relationship with income inequality. The results are invariant using alternative income inequality indices and using external instrument against internal instrument in identifying the equations.

How has the global financial crisis affected syndicated loan terms in emerging markets? Evidence from China

AbstractThis paper examines the impact of the recent global financial crisis on the cost of debt capital (syndicated loans) in a leading emerging market, namely China, using the difference‐in‐differences approach. Before the crisis, China adopted banking reforms allowing the entry of foreign banks and more domestic participation in the syndicated loan market. As a result, during the crisis, the volume of syndicated loans grew steadily, in contrast to other countries. In addition, the amount of foreign syndicated loans decreased and average maturity increased compared with the pre‐crisis period. Our findings provide useful information to policy makers for devising effective responses to financial crises.

The Heterogeneous Composition of Syndicated Loan Consortiums

The global syndicated loan market has been given new impetus after the slowdown during the worst years of the recent crisis. In recent times a new trend has become apparent with regard to the operators in this market, with institutional investors playing an ever more important role, as opposed to the banks that have traditionally dominated the market. This paper offers a brief introduction to the main features, contractual arrangements and players of syndicated loans, examines the structure and functions of syndicated loan consortiums in greater detail, and proposes their classification as a horizontal contractual business network. It also analyses their growing heterogeneous composition and concludes that some related goverance problems in the consortium could be fruitfully addressed from the business networks perspective.

Should companies care who their lender is? Evidence from loan covenants

Non-bank lenders are an increasingly important part of the syndicated loan market, particularly for riskier borrowers who require intensive monitoring. Interestingly, when non-bank lenders arrange loans, they impose fewer and looser covenants. Although the prior literature shows that banks play an active role in corporate governance following covenant violations, non-banks are not likely to intervene in borrowers’ decision making in similar circumstances. We also investigate possible explanations for the weak enforcement of loan covenants by non-banks and find that non-bank lenders do not appear to improve their monitoring abilities by learning from previous default experiences on loan portfolios as banks do.

Lender Laws and International Lending

The multinational syndicated loan market has crossed the $7 trillion threshold. Prior literature argues that weak borrower country’s creditor rights is the main limiting factor to cross-border lending. We find that lender country’s creditor rights can partly substitute for weak borrower creditor rights if a lender is from a better creditor rights country. Our results are robust to controlling for a borrower’s country laws, its foreign assets, the loan guarantees provided by its foreign parent, and its choice set of lenders. (DealScan-WorldScope link table is available on https://wrds-www.wharton.upenn.edu/pages/get-data/linking-suite-wrds/dealscan-worldscope-link/ )

Financial integration in Africa: New evidence using network approach

We provide an empirical analysis of the network structure of African countries based on a unique data set from the syndicated loans market. Using dynamic panel estimation techniques, we analyse the effects of economic, political and trade integrations on finance. Our findings reveal that the network-based measures perform relatively better than the conventional measures in most cases. Economic activities and money supply will help to strengthen the financial sector of the African economies. Moreover, we establish the significance of connectivity within and outside the continent during the integration process. Political and trade influences are somewhat weak and need further attention.

Is Tax Return Information Useful to Equity Investors?

I examine whether tax return information is incrementally useful to equity investors relative to publicly-available information, such as financial statements. To test this relation, I exploit unique features of the syndicated loan market, as prior literature shows that lenders obtain tax returns from borrowers and that lenders’ private information is transmitted to equity markets when institutional investors are part of a loan syndicate. I find economically significant increases in tax expense valuation and decreases in tax-related market anomalies following the issuance of institutional syndicated loans, consistent with equity investors finding information about firm performance in tax returns that is useful for their trading decisions. I also document that tax returns are a valuable information source that can motivate institutional investor participation in loan syndicates. This study extends prior research and informs the current policy debate over public disclosure of corporate tax return information by showing that investors can find information in firms’ tax returns that is incremental to the information in firms’ financial statements.

Is Analyst Coverage Valuable in the Syndicated Loan Market? Evidence from a Natural Experiment

In this study, I exploit an exogenous decrease in analyst coverage to investigate whether analyst coverage terminations have causal effects on the syndicated loan market. My principal results show that a decrease in the number of analysts following a firm increases the all-in-drawn spread of private loans by 14.2 basis points. I then show that the effects are larger for samples that have a larger percentage decrease in analyst estimates, a larger standard deviation of analyst estimates, more non-EPS analyst estimates, a higher leverage ratio or a credit rating lower than A. In addition, I also find that coverage terminations decrease the number of syndicated loans that treated firms can get, shorten the syndicated loan maturity period and decrease the likelihood of less-informed lenders being the lead arranger. These results indicate that public information still matters for syndicated lenders, even though they can acquire private information through other channels. Potential mechanisms might be that analyst reports provide extra information; analysts help lenders to monitor borrowers; and analyst coverage affects the private loan market through the public bond market since private loans and public bonds are partial substitutes. This paper contributes to the literature first by documenting a new factor, analyst coverage, that has an impact on the syndicated loan market; this helps us understand the price, structure and characteristics of lenders in that market. From another angle, this paper also demonstrates the importance of analyst coverage from a new perspective. Second, I examine causal effects by exploiting a natural experiment.

Development Costs Capitalization and Debt Financing

This 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.

Unconventional Monetary Policy and Bank Risk Taking

In this paper we use corporate syndicated loan data to study the presence of a bank risk-taking channel of unconventional monetary policy in the United States over the period 2008-2015. To account for both actual policy decisions and anticipation effects, we measure the stance of monetary policy by estimating a financial VAR model. We find that accommodative monetary conditions are associated with overall lower loan spreads. Controlling for borrower creditworthiness, we show that the spread reduction is lower for riskier firms, indicating that risk is appropriately priced during the period of unconventional monetary policy. Banks with low non-performing loan ratios and banks characterized by high revenue diversification offer larger loan spread discounts compared to banks with a large amount of non-performing loans and banks with less income diversification. We also find that banks with low capital ratios, less profitable banks and smaller banks more aggressively reduce the corporate loan spreads following an expansionary monetary policy shock, but only for the safest firms. Our findings indicate that unconventional monetary policy actions of the Federal Reserve are not associated with excessive risk taking by banks in the syndicated loan market.

Lenders’ Trade Group Adopts Optional Arbitration Clause for Model Latin America Documentation

The New York‐based Loan Syndications and Trading Association, or LSTA, is the leading industry organization in the Americas for lenders and investors in the syndicated loans market. See www.lsta.org.