Using data from S&P and the Federal Reserve, we show that arrangers retain larger shares in loans for which the spread was increased because investors indicated a low willingness to pay. Consequently, arrangers will often explicitly or implicitly underwrite loans and assume this. In practice, borrowers often have little flexibility over the total loan amount, and therefore will require guarantees from the arranger that the necessary funds will be raised (e.g. This second aspect generates risk about how much of the loan can be placed with investors. To induce institutional investors to truthfully reveal their willingness to pay, the arranger must also allocate less of the loan to investors with low reported willingness to pay and more to investors with high reported willingness to pay (Benveniste and Spindt 1989). Figure 3 shows that spreads are adjusted either up or down for about 50% of the syndicated leveraged term loans. What are the economic mechanisms behind this pipeline risk? We show that the role of an arranger in the new model of syndicated lending is to elicit institutional investors’ willingness to pay a share of the loan, to decrease the interest rate spread when possible, and increase it when necessary to place the loan. Source: S& P Capital IQ's Leveraged Commentary and Data (LCD).4 It stems from the need to underwrite loan syndications, and uncertainty about how much of the loan can actually be placed with institutional investors.įigure 2 Institutional investor share in syndicated term loans ![]() This is the risk associated with marketing the loans during the syndication process. Sufi 2007), in a recent article we argue that while the sharp decrease in ultimate retention of syndicated loans has reduced the arranging banks’ exposure to traditional credit risk, the shift in the business model generates what we call pipeline risk (Bruche et al. While a large literature studies the consequences of loan syndication on the incentives to monitor borrowers (e.g. The shift in the syndicated loan business model has also affected the nature of the associated risks that arrangers are now exposed to. Currently the arranging banks retain, on average, only about 5% of a term loan. One consequence of these changes in the syndicated loan market is that the arranging bank nowadays aims to distribute as much of the loan as possible to these institutional investors, and keep very little or nothing on their banks. By the end of 2014, the institutional investors’ share in the syndicated term loan market exceeded 70% (see Figure 2).įigure 1 Source of financing of non-financial firms worldwide With the rise of the originate-to-distribute-to-nonbanks model and the secondary market for syndicated loans, institutional investors such as mutual funds and collateralised loan obligations started to provide additional funding for the syndicated term loan market (Bord and Santos 2012). ![]() In the early 1990s, a bank that arranged a syndicated loan partnered with other banks to form the term loan syndicate, and the arranging banks kept a substantial share of the loan (20–30%) on its books. ![]() ![]() Much of the expansion in syndicated lending has been driven by fundamental changes in the syndicated term loan market. In 2016, non-financial corporations borrowed $3.4 trillion worldwide from the syndicated loan market, making this source of funding significantly larger than the issuance of bonds and equity (see Figure 1). Syndicated loan issuance – in which banks partner with other financial institutions to originate large loans – has grown dramatically over the last 25 years.
0 Comments
Leave a Reply. |