Syndicated Loans

Abstract

This paper analyzes the market for syndicated loans, a hybrid of public and private debt. The market is large (over $1 trillion in 1997) and growing rapidly. While loan sales have been heavily researched, there has been little work on syndications, which differ in character from sales. We describe the syndication process and present empirical evidence that the extent to which a loan can be syndicated increases as information about the borrower becomes more transparent, as the syndicate's lead manager becomes more reputable, as the loan's maturity increases, and as the loan lacks collateral. The lead bank holds larger portions of information-problematic loans in its own portfolio. Loan syndications, like loan sales, appear to be motivated by capital regulations, but the liquidity position of the lead agent does not influence its syndication behavior. In general, our results support the hypothesis that where information is less than fully transparent, debt contracts are marketed to investors with specialized monitoring skills who rely on contract characteristics and seller reputation to resolve information asymmetry and agency problems.

JEL Classification: G1, G2