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

30 Pages Posted: 1 Mar 2009

See all articles by Issam Hallak

Issam Hallak

European Commission Joint Research Center; KU Leuven - Faculty of Business and Economics (FEB)

Paul Schure

University of Victoria - Economics

Date Written: February 27, 2009

Abstract

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

Keywords: Financial Intermediation, Syndicated loans, Sovereign debt, Relationship Lending, Debt Renegotiation, Illiquidity, Number of Lenders

JEL Classification: G21, F34

Suggested Citation

Hallak, Issam and Schure, Paul, Why Larger Lenders Obtain Higher Returns: Evidence from Sovereign Syndicated Loans (February 27, 2009). CAREFIN Research Paper No. 4/09. Available at SSRN: https://ssrn.com/abstract=1350247

Issam Hallak (Contact Author)

European Commission Joint Research Center ( email )

1049
Belgium

KU Leuven - Faculty of Business and Economics (FEB) ( email )

Naamsestraat 69
Leuven, B-3000
Belgium

Paul Schure

University of Victoria - Economics ( email )

Victoria V8W Y2Y, BC
Canada

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