Syndicated Loan Spreads Research Articles

When shareholders cross-hold lenders’ equity: The effects on the costs of bank loans

We show that syndicated loan spreads are lower as borrowers’ shareholders cross-hold more lenders’ equity. Apart from controlling for borrower and lender fixed effects and various other ownership measures, we address endogeneity concerns by conducting a difference-in-differences analysis exploiting the mergers of institutional investors. Additional tests on cross-holding shareholders’ holding period, the impact of active cross-holders, subsamples of borrowers subject to different degrees of shareholder–creditor conflicts, changes in borrower risk around loan initiation, and the number of financial covenants provide support for the hypothesis that borrower shareholders’ equity holdings of lenders reduce agency costs of debt.

Firms’ Bond Market Access and Impact on Bank Borrowing Costs

AbstractThis paper documents that companies with bond issuance are larger, are more leveraged, and have higher financing needs, but have lower observed syndicated loan spreads. Using endogenous treatment and outcome estimations, we find that companies would potentially face an average of 114 to 185 basis points (bps) higher loan spreads in counterfactual absence of bond market access, significantly larger than observational difference (57 bps) or existing estimates in the literature. This finding underscores the importance of bond markets for corporate financing and overcoming lending constraints or market power of banks, and also casts doubt on valued banking services as the explanation why loans are more costly to bonds. We also find bond issuance as information release a partial explanation only.

Factors Influencing Syndicated Loan Spreads: A Review of Literature

In this paper we review the literature on factors influencing syndicated loan spreads, the mechanics and the direction of the impact. The review is structured around four major groups of factors on syndicated loan spreads: loan characteristics, borrower characteristics, country characteristics and lender characteristics. It is intended to facilitate the development of testable hypotheses for different time periods and different geographical samples of countries. It can also serve as a guide for policymakers looking to identify potential indicators that can serve as a basis for further analyses in order to provide recommendations for lowering the cost of funding for borrowing firms. Keywords: syndicated loans, determinants, loan spreads, literature review DOI: 10.7176/JESD/13-18-03 Publication date: September 30 th 2022

Determinants of Syndicated Loan Spreads in Central, Eastern and South-Eastern European Countries

Despite the importance of the syndicated loan market as a source of international financing there is limited evidence on factors influencing syndicated loan pricing in European developing economies. Focusing in one particular region reduces the problem of cross-country heterogeneity and provides more specific policy recommendations for reducing the cost of funding for firms, in an environment where capital markets are less developed, and banks are seen as the main source of funding. This study investigates the determinants of syndicated loan spreads in a sample of 1004 syndicated loans from the Thomson One Banker database, granted to borrowers from 12 Central, Eastern and South-Eastern European countries. The results show that loan and country characteristics are the most significant determinants of syndicated loan spreads. Lenders seem to price loan characteristics in European transition economies in accordance with the existing academic literature – riskier loans are charged higher spreads. Augmenting the Thomson One Banker with the Worldscope database, we further find that borrower characteristics are generally significant determinants of syndicated loan spreads however their significance weakens once country characteristics are taken into account. Lender characteristics are found not to be significant determinants of syndicated loan spreads in European transition economies. The implication of these results is that governments of European transition countries have a major role to play in providing a macro-economic and legal infrastructure that will enable borrowing firms to get access to funding sources at lower spreads. Keywords: syndicated loans, spreads, emerging Europe, Thomson One Banker, Worldscope DOI: 10.7176/JESD/13-18-02 Publication date: September 30 th 2022

The E ect of Government-Sponsored Enterprise Participation on Syndicated Loan Spreads

The E ect of Government-Sponsored Enterprise Participation on Syndicated Loan Spreads

The effect of borrower country financial system and corporate governance system types on the spread of syndicated loans

PurposeThis study aims to analyse the effect of borrower’s countries on syndicated loan spreads, featuring countries according to institutional factors, namely, financial systems and corporate governance systems.Design/methodology/approachThis study is an empirical investigation based on a unique sample of more than 85,000 syndicated loans from 122 countries. The paper uses standard and two-stage least squares regression analysis to test whether the types of financial and corporate governance systems affect loan spreads.FindingsThe paper finds that borrowers from countries with financial systems oriented towards the banking-based paradigm pay lower interest rate spreads than those from countries with financial systems oriented towards the market-based paradigm. In addition, there is evidence that borrowers from countries with more developed financial systems pay lower spreads. The results also show that borrowers from countries with an Anglo-Saxon governance system pay higher spreads than borrowers from countries with a Continental governance system.Research limitations/implicationsThis study does not consider potential promiscuous relationships that can arise at the ownership structure and governance level between banks and borrowers and may affect loan spreads.Practical implicationsThis study suggests that financial and corporate governance systems are essential factors in the financial intermediation process. Furthermore, the evidence indicates that corporates with higher potential agency costs and higher potential information asymmetry are requested to pay higher spreads. Therefore, the opportunities to such corporates invest optimally tend to be scarcer.Originality/valueThe paper highlights the impact of institutional factors on the cost of financing, characterising the countries according to the type of financial system and the type of corporate governance system. The study finds that borrowers from countries with bank-based financial systems pay lower interest rate spreads than those from countries with market-based financial systems. The paper also highlights how the level of financial development affects the cost of financing. The paper focusses on non-financial firms, unlike financial firms, which have been the focus of several empirical studies on topics relating to the cost of funding and corporate governance.

GeneralistCEOsand Credit Ratings*

ABSTRACTA recent trend is that firms prefer to hire generalist CEOs with transferable skills (across firms or industries) over hiring specialist CEOs, but the consequences of this trend are unclear. In this study, we examine whether credit rating agencies consider a CEO's general skills as a credit risk factor when assessing an entity's overall creditworthiness. We predict and find that generalist CEOs are associated with lower credit ratings, suggesting that the presence of generalist CEOs is a significant credit rating factor. We also find that generalist CEOs are likely to take on more risks, which leads to more volatile performance ex post, and our path analyses confirm default risk is a significant mediator between credit ratings and CEOs' general skills. Our results hold in the presence of additional controls (e.g., CEO characteristics and corporate governance), when applying different fixed‐effect models and different matching methods, and for a subsample with forced CEO turnover. We also find that the negative relationship is attenuated for R&D‐intensive firms and firms in competitive industries. Last, we provide evidence that firms with generalist CEOs face higher borrowing costs, such as bond yields and syndicated loan spreads. Overall, our results contribute to a growing literature on the costs and benefits of hiring generalist CEOs, by providing a full picture of why hiring a generalist CEO may benefit shareholders but also cause misalignments with bondholders' interests.

Generalist CEOs and Credit Ratings

A recent trend is that firms prefer to hire generalist CEOs with transferable skills (across firms or industries) over hiring specialist CEOs, but the consequences of this trend are unclear. In this study, we examine whether credit rating agencies consider a CEO’s general skills as a credit risk factor when assessing an entity’s overall creditworthiness. We predict and find that generalist CEOs are associated with lower credit ratings, suggesting that the presence of generalist CEOs is a significant credit rating factor. We also find that generalist CEOs are likely to take on more risks, which leads to more volatile performance ex post, and our path analyses confirm default risks is a significant mediator between credit ratings and CEOs’ general skills. Our results hold in the presence of additional controls (e.g., CEO characteristics and corporate governance), when applying different fixed-effect models and different matching methods, and for a subsample with forced CEO turnover. We also find that the negative relationship is attenuated for R&D-intensive firms and firms in competitive industries. Last, we provide evidence that firms with generalist CEOs face higher borrowing costs, such as bond yields and syndicated loan spreads. Overall, our results contribute to a growing literature on the costs and benefits of hiring generalist CEOs, by providing a full picture of why hiring a generalist CEO may benefit shareholders but also cause misalignments with bondholders’ interests.

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.

Stock market illiquidity, bargaining power and the cost of borrowing

Abstract We show that firms with illiquid stock have higher syndicated loan spreads. This result is invariant to measurement of stock illiquidity, and is robust to a wide set of cross-sectional loan and firm features, firm and time fixed effects. It also holds using a matched difference-in-differences estimator, at an exogenous reduction in the minimum tick size of major United States exchanges, and using a two-stage least squares estimator. Stock illiquidity is shown to increase spreads more when a lead lender has a high market share or a borrower has a low credit rating. It increases spreads less when a borrower has public rated debt and it diminishes the benefit to the loan recipient of a lending relationship. Measurements of stock price informativeness and firm-level governance do not affect the stock illiquidity and loan spread relation. A rationale for these findings is that stock illiquidity impairs the bargaining power of corporate borrowers, in negotiating a loan rate, as it raises the cost of alternatively raising funds by issuing equity.

The impact of financial crises on the syndicated loan spreads applied to public and private firms

We investigate the impact of financial crises on the syndicated loan spreads applied to public and private firms. We found evidence of a greater increase in loan spreads for European public firms than for private ones during the global financial crisis and the euro area sovereign debt crisis. This result is consistent with our hypothesis that public firms’ borrowing costs are more sensitive to financial market swings than those of private companies. Our results hold when we control for relationship banking effects, a different sample composition between crisis and non-crisis periods, estimating a propensity score matching, and adopting a sample of syndicated loans to US public firms.

The CDS-Loan Basis Across Firms and the Business Cycle

We analyze the difference between credit default swap (CDS) and syndicated loan spreads, defined as the “CDS-loan basis”. Our results indicate that the CDS-loan basis is greater when the cost of information asymmetry is higher, such as for riskier borrowers and in economic downturns. Our findings suggest that loan spreads applied to riskier borrowers are less correlated with the business cycle than CDS spreads. Overall, our analysis is consistent with the hypothesis that, at least in part, banks still play a special role in the current financial system compared with other investors.

Do multiple credit ratings affect syndicated loan spreads?

We analyze whether soliciting multiple ratings leads to lower syndicated loan spreads. Our results document that banks apply, on average, lower spreads to multi-rated firms. This effect depends on the reduction of information asymmetry about borrowers’ creditworthiness (information production hypothesis) and on the benefits in regulatory terms (regulatory certification hypothesis). In addition, consistent with the rating shopping hypothesis, we find that banks price the risk that borrowers shopped for better ratings, especially in crisis periods. Our results also hold when considering crisis periods, the unobserved heterogeneity of lenders, the use of rating-based pricing, and adopting a matched sample.

Do Multiple Credit Ratings Affect Syndicated Loan Spreads?

We analyse whether soliciting multiple ratings leads to lower syndicated loan spreads. Our results document that banks apply, on average, lower spreads to multi-rated firms. This effect depends on the reduction of information asymmetry about borrowers’ creditworthiness (information production hypothesis) and on the benefits in regulatory terms (regulatory certification hypothesis). In addition, consistent with the rating shopping hypothesis, we find that banks price the risk that borrowers shopped for better ratings, especially in crisis times. Our results also hold taking into account crisis periods, the unobserved heterogeneity of lenders, the use of rating-based pricing, and adopting a matched sample.

The impact of sovereign rating changes on European syndicated loan spreads: The role of the rating-based regulation

We analyze the impact of sovereign rating changes on European corporate loan spreads. We demonstrate that sovereign downgrades lead to significant increases in the spread of loans to domestic firms. We find evidence that the negative effects of a sovereign downgrade are widespread across all firms, also unrated, which are the majority of firms in the European syndicated loan market. A relevant part of this impact depends on the reliance of financial regulation on credit ratings (certification effect), which reduces also loan size and leads to additional burdens for investment grade firms. Instead, we do not find evidence of a significant impact generated by an upgrade. Our results hold also controlling for the sovereign risk, crisis periods, lender characteristics, and endogeneity of loan contract terms.

Global Banks and Syndicated Loan Spreads: Evidence from U.S. Banks

This paper explores the relationship between bank global exposure and their syndicated loan spreads. Linking syndicated loan information from Dealscan with confidential US bank foreign exposure data and borrower characteristics, we find that more bank global exposure is associated with a higher loan spread that is statistically significant. To analyze this relationship between global banks and loan spreads, we develop a theoretical framework where, in equilibrium, riskier borrowers are more likely to work with global banks. Using a Heckman selection model, we confirm that borrower risk characteristics indeed predict a higher likelihood of having a loan arranged by a global bank. However, after controlling for the bank-borrower selection effect, we continue to find that global banks charge on average an 12.7 bps higher spread on their syndicated loans, as compared with domestically focused banks. Finally, we explore a non-risk based alternative where firms with multinational operations are more likely to work with global banks for international banking services.

Does Stock Market Illiquidity Influence the Cost of Borrowing? Evidence from Syndicated Loans

We show that firms with illiquid stock pay higher syndicated loan spreads. This result is invariant to multiple measurements of stock illiquidity, and is robust to a wide set of cross-sectional loan and firm features, firm and year fixed effects. This result also holds using matched difference-in-differences at an exogenous reduction in the minimum tick size of major United States exchanges and using a two-stage least squares estimator. Stock illiquidity is, moreover, shown to diminish the benefit to the loan recipient of a lending relationship. A rationale for these findings is that stock market illiquidity impairs the bargaining power of corporate borrowers, in the loan spread negotiating procedure, as it raises the cost of alternatively issuing equity. Our findings, thus, indicate that relative bargaining power plays a systematic role in determining syndicated loan spreads.

Advisor Lending to the Advised Acquirer During M&A: Conflict of Interest or Last Resort Financing?

Previous research has shown that acquirers’ M&A announcement effects, on average, become significantly positive if loan financing is involved. We find that when advisors lend to their advised acquirers during M&A deals, the syndicated loan spreads are unusually high, and the advisor-lender dual role significantly reduces the acquirers’ announcement effect. This appears to reflect conflicts of interest, undermining the information production/certification role of loan financing. However, evidence that high need for external finance justifies the expensive advisor lending supports a last-resort-financing explanation instead — investment banks act as a last resort through the advisor-lender dual role in M&A.

Global Banks and Syndicated Loan Spreads: Evidence from U.S. Banks

This paper explores the relationship between bank global exposure and their syndicated loan spreads. Linking syndicated loan information from Dealscan with confidential US bank foreign exposure data and borrower characteristics, we find that more bank global exposure is associated with a higher loan spread that is statistically significant. To analyze this relationship between global banks and loan spreads, we develop a theoretical framework where, in equilibrium, riskier borrowers are more likely to work with global banks. Using a Heckman selection model, we confirm that borrower risk characteristics indeed predict a higher likelihood of having a loan arranged by a global bank. However, after controlling for the bank-borrower selection effect, we continue to find that global banks charge on average an 12.7 bps higher spread on their syndicated loans, as compared with domestically focused banks. Finally, we explore a non-risk based alternative where firms with multinational operations are more likely to work with global banks for international banking services.

Corporate Diversification and the Cost of Debt: The Role of Segment Disclosures

ABSTRACT Previous theoretical arguments suggest that industrial diversification provides a co-insurance effect that decreases the firm's default risk. In this paper, we endogenously estimate a firm's segment disclosure quality and investigate whether the quality of segment disclosures significantly affects bond investors' assessment of the co-insurance effect of diversification. We document that bonds issued by industrially diversified firms with high-quality segment disclosures have significantly lower yields than bonds issued by diversified firms with low-quality segment disclosures. We also find that the negative relation between industrial diversification and bond yields becomes stronger when firms improve segment disclosures as a result of FAS 131. Finally, we show that high-quality segment disclosures are associated with lower syndicated loan spreads for a subsample of loans issued by large bank syndicates, which are more likely to rely on publicly reported segment information. JEL Classifications: G31; G32; M10; O16.