Loan Syndication Research Articles

Does a Banking Relationship Help a Firm on the Syndicated Loans Market in a Time of Financial Crisis?

The volume of credit granted in the form of syndicated loans saw a marked downturn in 2008. This article seeks to understand how certain firms were nonetheless able to benefit from larger facilities or a lower interest rate than others. Using a sample of syndicated loans issued in 2008 in North America and Europe, and records of syndicated loans since 2003, we show that firms that had developed a relationship with an investment bank obtained a lower spread, but did not benefit from greater loan facilities or longer maturities.

Price Discovery and Dissemination of Private Information by Loan Syndicate Participants

ABSTRACTWe delineate key channels through which flows of confidential information to loan syndicate participants impact the dynamics of information arrival in prices. We isolate the timing of private information flows by estimating the speed of price discovery over quarterly earnings cycles in both secondary syndicated loan and equity markets. We identify borrowers disseminating private information to lenders relatively early in the cycle with firms exhibiting relatively early price discovery in the secondary loan market, documenting that price discovery is faster for loans subject to financial covenants, particularly earnings‐based covenants; for borrowers who experience covenant violations; for borrowers with high credit risk; and for loans syndicated by relationship‐based lenders or highly reputable lead arrangers. We then ask whether early access to private information in the loan market accelerates the speed of information arrival in stock prices. We document that the stock returns of firms identified with earlier private information dissemination to lenders indeed exhibit faster price discovery in the stock market, but only when institutional investors are involved in the firm's syndicated loans. Further, the positive relation between institutional lending and the speed of stock price discovery is more pronounced in relatively weak public disclosure environments. These results are consistent with institutional lenders systematically exploiting confidential syndicate information via trading in the equity market.

Banking environment and loan syndicate structure: a cross-country analysis

What is the influence of the banking environment on bank syndicate structure? We provide empirical evidence on this issue by examining the influence of several banking environment characteristics, including the structure of the banking market, financial development, banking regulation and supervision and legal risk, on the structure of bank syndicates. The results of a cross-country analysis performed on a sample of 15 586 syndicated loan facilities for borrowers from 24 countries confirm that syndicate structure is influenced by banking environment in a way consistent with minimizing agency costs and efficient re-contracting objectives.

Combining Banking with Private Equity Investing

Bank-affiliated private equity (PE) groups account for 30% of all PE investments. These affiliated groups’ market share is highest during peaks of the PE market, as is the fraction of transactions where the parent bank leads the loan syndicate (parent-financed deals). Bank-affiliated deals are similar in characteristics and financing to stand-alone deals, but have worse outcomes if consummated during the peaks of the credit market. Parent-financed deals enjoy significantly better financing terms than standalone deals, but do not exhibit better performance. The parent-financing advantage in loan terms is concentrated during credit market peaks when banks tend to syndicate more of the loans to external loan investors, and is not explained by the banks’ previous relationships with the targets, the PE groups’ reputations, or the banks’ prominence in structured financing markets. Banks’ involvement in private equity investments provides significant cross-selling opportunities. Collectively, this evidence is consistent with banks’ taking advantage of favorable credit-market conditions.

Do Lead Banks Exploit Syndicate Participants? Evidence from Ex Post Risk

Loan syndication involves a repeated game between lead banks and syndicate members. Lead banks do not use their private information to exploit syndicate participants but rather focus on accurately certifying loan quality. Using borrowers' financial ratios (shifts in Altman's Z scores) after origination to proxy for bank private information, we find that lead banks syndicate larger proportions of loans that subsequently do not experience lower Z scores. Performance pricing covenants under which borrowers commence to pay higher spreads if ratios (or credit ratings) deteriorate constitute a positive signal reducing agency costs and are associated with higher proportions of syndication.

Loan Syndication and Credit Cycles

Cyclicality in the supply of business credit has been the focus of a considerable amount of research. This cyclicality can stem from shocks to borrowers’ collateral, which affect firms’ ability to raise capital if agency and information problems are significant (Ben S. Bernanke and Mark Gertler 1989). Or it can stem from shocks to bank capital, which affect the supply of bank loans if agency and information problems limit the ability of banks to raise additional capital (Bernanke 1983). Both of these channels may have been at work during the financial crisis that started in 2007. Ran Duchin, Oguzhan Ozbas, and Berk A. Sensoy (2010) show that firms with more collateral were better able to withstand the contraction in credit, and Victoria Ivashina and David Scharfstein (2010) show that reductions in bank capital had an adverse effect on lending. In this paper, we examine cyclicality in the supply of credit in the context of modern forms of banking, often referred to as the “originateto-distribute” model. In particular, we are interested in the role of syndicated lending. In traditional bank lending—the focus of most models of banking—banks originate and hold loans on their balance sheets. This exposes banks to risk but provides them with strong incentives to screen and monitor borrowers (Douglas W. Diamond 1984). Over the last 20 years, however, the development and growth of the syndicated loan market has enabled a bank to originate a loan but retain only a fraction of it. On average, the originating bank (or “lead bank”) retains about a third of each syndicated loan and sells the remaining share to a syndicate of investors, which includes banks and institutional investors such as pension funds, mutual funds, hedge funds, and sponsors of structured Loan Syndication and Credit Cycles

Foreign Bank Lending and Information Asymmetries in China

This paper considers whether information asymmetries affect the willingness of foreign banks to participate in syndicated loans to corporate borrowers in China. In line with theoretical literature, ownership concentration of the borrowing firm is assumed to influence information asymmetries in the relationship between the borrower and the lender. We analyze how ownership concentration influences the participation of foreign banks in a loan syndicate using a sample of syndicated loans granted to Chinese borrowers in the period 2004-2009 for which we have information on ownership concentration. We observe that greater ownership concentration of the borrowing firm does not positively influence participation of foreign banks in the loan syndicate. Additional estimations using alternative specifications provide similar results. As foreign banks do not react positively to ownership concentration, we conclude that information asymmetries are not exacerbated for foreign banks relative to local banks in China. Moreover, it appears that increased financial leverage discourages foreign bank participation, suggesting that domestic banks are less cautious in their risk management.

Do Trade and Capital Flows Complement Each Other? Evidence from the US Syndicated Loan Market

Do Trade and Capital Flows Complement Each Other? Evidence from the US Syndicated Loan Market

Auditor Quality and Ownership Structure of Syndicated Loan Deals

This study investigates a hitherto unexplored question of whether banks and other private lenders take into account the quality of external auditors appointed by borrowers when structuring the ownership of syndicated loans. Our empirical analyses, using a sample of U.S. loan data from 1992 to 2007, show several interesting findings. First, the percentage of a syndicated loan retained by lead arrangers is smaller for the loan to borrowers with Big 4 auditors than for the loan to borrowers with non-Big 4 auditors. Second, the effect of auditor quality (Big 4 versus non-Big 4) on loan ownership structure is more pronounced when the borrower has a high default risk. Finally, our change analyses show that the change in auditor quality is associated with the change in the ownership structure of syndicated loans: upgrading auditor from a non-Big 4 auditor to a Big 4 auditor leads to a significant decrease in the ownership retention by the lead arrangers. Overall, our results suggest that auditor quality plays an important role in loan syndication by alleviating information asymmetries between lead arrangers and non-lead participating lenders of the syndicated loan.

How to Get a Syndicated Loan Fast? The Role of Syndicate Composition and Organization

We empirically investigate the organizational determinants of the speed of a loan syndication process, with a particular focus on the influence of syndicate composition and organization. Indeed, the major advantage of syndicated lending is the speed with which the required funding can be obtained, while syndication composition and organization are considered as crucial for successful syndication. In a cross-country framework, we find that syndicate composition and organization characteristics clearly matter for the duration of the syndication process and therefore for borrower satisfaction in terms of the speed of obtaining the necessary funding. In particular, a syndicate composition and organization adapted to the specific agency problems of syndication, with numerous, reputable and experienced arrangers holding a larger portion of the loan and with more lenders from the same country as the borrower reduces the duration.

What's Bank Reputation Worth? The Effect of Fraud on Financial Contracts and Investment

The risk of a reputation loss can provide an informal enforcement mechanism when contracts are incomplete. This paper provides evidence that reputation and formal incentives to monitor are substitutes in the context of syndicated credit. Monitoring in a loan syndicate is delegated to lead banks, whose formal incentives are determined by their share of the loan. Exploiting as a source of variation the reputation loss suffered by banks actively lending to firms subsequently involved in fraud scandals, we use within-firm estimators to show that monitoring banks face higher-powered contracts - higher loan shares - after a reputation loss. Despite this substitution, banks supply less credit and borrower financial policy and investment are affected, indicating that formal incentives are an imperfect substitute for reputation.

A New Japan for the Twenty-First Century: An Inside Overview of Current Fundamental Changes and Problems (review)

Reviewed by: A New Japan for the Twenty-First Century: An Inside Overview of Current Fundamental Changes and Problems Dick Stegewerns (bio) A New Japan for the Twenty-First Century: An Inside Overview of Current Fundamental Changes and Problems. Edited by Rien T. Segers. Routledge, London, 2008. xvi, 284 pages. $150.00. This book compiles the results of a research group on developments in contemporary Japan that was active at the International Research Center for Japanese Studies (Nichibunken) in Kyoto during the academic year 2006–7. [End Page 495] The project aims to provide internal views of a Japan “in a significant transition period, comparable to the Meiji Restoration of 1868 or the period immediately after the Second World War” (back cover). The group’s point of departure is “the urgent need to bridge the gap between the identity and the image of contemporary Japan . . . based on the structural inadequacy of currently interpretive models” (p. 5). The team leader and editor Rien T. Segers, on the basis of a textbook by Duncan McCargo, distinguishes mainstream (modernization theory), revisionist (Japan-bashing), and culturalist (Ruth Benedict, Nihonjinron) perspectives. The major common shortcoming observed is the tendency toward biased judgment over objective interpretation, due to either Japancentrism or Eurocentrism. Accordingly, “the three existing interpretive perspectives can no longer fulfil the requirements for the construction of an adequate interpretation of a rapidly changing Japan, caught between globalization and localization” (p. 10). Whereas Segers admits that “the localization-globalization paradox” is a universal phenomenon, he is adamant that Japan deserves special attention because “the quality and quantity of this paradox seem to be much more manifest in Japan than anywhere else” (p. 13) and inform most fundamental changes and problems in Japan today. Are there merely three existent perspectives? Is there need for a fundamental reinterpretation? Can there be one superior and comprehensive perspective? And, if there is, can we expect this to be provided by a group of indigenous senior scholars? Segers makes clear that the project cannot possibly be all-encompassing and that the various contributions should be regarded as test cases with wider implications. Because they are very different, I discuss them separately. The first section on business and technology consists of two chapters. Nobuyoshi Yamori and Narunto Nishigaki describe how the universal processes of globalization, liberalization, and technological innovation have led to mergers into megabanks, the advance of netbanking, the increasing prominence of foreign shareholders, limits to corporate governance by banks, and the shift to loan syndicates. The start of this ambitious book project is not very auspicious. The writing is difficult to grasp for lay readers, and the lack of international comparison leaves us in the dark as to where to position Japanese banks and their future. Specialist content also hampers Taizo Yakushiji’s contribution on technology, but it is mainly too short and provides only a general understanding of technological competition. Accordingly, one wonders whether Japan’s technological position “is unique in that its strength rests not in hard power but rather in soft power” and why Japan has to “play a decisive role” and “should always go one step ahead” (pp. 56, 63). The second section on politics, governance, and foreign policy starts with a chapter on Japanese contemporary politics by the prominent political [End Page 496] scientist Takashi Inoguchi. This is a succinct and well-structured overview, centered on the omnipotent Liberal Democratic Party (LDP), and stands out for choosing the complete shift of focus toward economic growth in 1960 and the Plaza Agreement of 1985 as turning points instead of the start of the 1955 structure and the end of the cold war. But there are some hiccups. His exhortation to nurture more mediagenic, populist, and decisive politicians capable of Koizumi Jun’ichirō’s type of leadership is in line with this age of television democracy. However, the demand that politicians become more technocratically competent than the bureaucrats seems somewhat unrealistic (pp. 79–80), and it is odd that these requests are solely addressed to the LDP and do not include the opposition, thus giving the impression that Inoguchi advocates the continuation of LDP rule. This is also where the chapter becomes fragmentary, at the very...

Do Audit Fees Influence Credit Risk and Asymmetric Information Problems? Evidence from the Syndicated Loan Market

In the syndicated loan market, potential accounting errors exacerbate credit risk and asymmetric information problems. The purpose of financial statement audits is to provide reasonable assurance that accounting records are free from material errors. In this paper, we examine whether an increase in the demand for auditing services is associated with a decrease in borrowers' credit risk and asymmetric information problems in the syndicated loan market. We present empirical evidence that a demand-induced increase in audit fees is associated with syndicated loans with lower interest rate spreads and shorter maturity lengths, which we interpret as evidence consistent with the assertion that these audit fee increases reduce credit-risk and asymmetric information problems. We empirically identify an increase in the demand for auditing services with instrumental variables that are intended to capture shifts in the demand curve for auditing services, rather than shifts in the supply curve for auditing services. In addition, we find that audit fees are positively associated with the number of lenders in loan syndicates, but are unable to attribute this association to an increase in the demand for auditing services.

Competition or Collaboration? The Reciprocity Effect in Loan Syndication

It is well recognized that loan syndication generates a moral hazard problem by diluting the lead arranger’s incentive to monitor the borrower. This paper proposes and tests a novel view that reciprocal arrangements among lead arrangers serve as an effective mechanism to mitigate this agency problem. Lender arrangements in about seven out of ten syndicated loans are reciprocal in the sense that lead arrangers also participate in loans that are led by their participant lenders. Syndicate lenders share reciprocity through such arrangements as they can mutually benefifit from each other’s monitoring effort. In fear of losing this reciprocity, lead arrangers will dutifully monitor their borrowers. Loans arranged in such a reciprocal way thus feature reduced moral hazard. I find strong empirical evidence that is consistent with the reciprocity effect.

Syndicated Loans, Foreign Banking and Capital Market Development

In this paper we examine the role of syndicated loan markets in financial market development in 24 European countries. We find credit spreads to be negatively related to market size in small markets and positively related in large financial markets. Syndicated loans play a different role in large versus small financial systems. In small markets, loan syndications are a substitute for missing public debt markets, while in large financial markets loan syndicates enable arrangers to spread risk more efficiently. Foreign banks tend to reinforce this effect. In small markets, they transfer external finance across borders and in large markets they tend to take on more risky projects. Consequently, we find that characteristics of loan contracts arranged by foreign banks in small versus large markets differ considerably.

On Securitization of International Syndicated Loans

Since 80s, along with the heating-up competition in finance industry and the liberalization trend of financial supervision, a tendency of integration appears in world three financial service fields, namely banking, insurance, and security. It threats the banking business. The banking industry that always possesses the core position in financial system faces enormous challenges. On the other hand, all countries regulate standard rate of interests for commercial banks’ deposits and loans. Therefore, the margin between banks’ assets and liabilities is limited, which leads to more fierce competition among banks. Under this background, the securitization trend serves as a bridge between direct financing and indirect financing, creating more opportunities for banks reducing costs and increasing profits, and improving banks’ competence. Starting from international syndicated loans, this paper analyzes the primary mode and the advanced mode of international syndicated loans’ securitization, compares their characteristics, and further studies reasons for securitization of international syndicated loans.

Why Larger Lenders Obtain Higher Returns: Evidence from Sovereign Syndicated Loans

Lenders that fund larger shares of a syndicated loan typically receive larger percentage upfront fees than smaller lenders. This paper studies sovereign syndicated loan contracts in the period 1982-2006 to explore this fact. In our dataset of 288 contracts large lenders obtain on average an 8.5 percent higher return on their funds than small lenders who join the syndicate. Our analysis shows that the return premium large lenders receive is positively affected by anticipated future liquidity problems of the borrower and by the number of banks. Our analysis also reveals that the return premium is not used to control the number of banks that join the syndicate. We interpret our findings as indicating that the fee structure on syndicated loans incorporates anticipated costs associated with a borrower illiquidity, notably the costs of coordinating the workout and providing liquidity insurance, but that the fee structure does not serve the additional purpose of curbing these costs by reducing the number of lenders in the syndicate

Large Debt Financing: Syndicated Loans versus Corporate Bonds

Following the introduction of the euro, the markets for large debt financing experienced a historical expansion. We investigate the financial factors behind the issuance of syndicated loans for an extensive sample of euro area non-financial corporations. For the first time we compare these factors to those of its major competitor: the corporate bond market. We find that large firms, with greater financial leverage, more (verifiable) profits and higher liquidation values tend to prefer syndicated loans. In contrast, firms with larger levels of short-term debt and those perceived by markets as having more growth opportunities favour financing through corporate bonds. JEL Classification: D40, F30, G21

Large Debt Financing: Syndicated Loans versus Corporate Bonds

Following the introduction of the euro, the markets for large debt financing experienced a historical expansion. We investigate the financial factors behind the issuance of syndicated loans for an extensive sample of euro area non-financial corporations. For the first time we compare these factors to those of its major competitor: the corporate bond market. We find that large firms, with greater financial leverage, more (verifiable) profits and higher liquidation values tend to prefer syndicated loans. In contrast, firms with larger levels of short-term debt and those perceived by markets as having more growth opportunities favour financing through corporate bonds.

Syndicated Loans, Foreign Banking and Capital Market Development

In this paper we examine the role of syndicated loan markets in financial market development in 24 European countries. We find credit spreads to be negatively related to market size in small markets and positively related in large financial markets. Syndicated loans play a different role in large versus small financial systems. In small markets, loan syndications are a substitute for missing public debt markets, while in large financial markets loan syndicates enable arrangers to spread risk more efficiently. Foreign banks tend to reinforce this effect. In small markets, they transfer external finance across borders and in large markets they tend to take on more risky projects. Consequently, we find that characteristics of loan contracts arranged by foreign banks in small versus large markets differ considerably.