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Equity-Holding Institutional Lenders: Do They Receive Better Terms?

52 Pages Posted: 24 Feb 2012  

Jongha Lim

California State University - Fullerton

Bernadette A. Minton

Ohio State University (OSU) - Department of Finance

Michael S. Weisbach

Ohio State University (OSU) - Department of Finance; National Bureau of Economic Research (NBER)

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Date Written: February 2012

Abstract

The past decade has seen significant changes in the structure of the corporate lending market, with non-commercial bank institutional investors playing larger roles than they historically have played. In addition, non-commercial bank institutional lenders are often equity holders in their borrowing firms. In our sample of 11,137 tranches of institutional "leveraged" loans, 2,008 (18%) have a non-commercial bank institution that also owns at least 0.1% of the firm's equity. Such "dual holder" loan tranches have higher spreads than otherwise similar loan tranches without equity holder participation. The dual holder premium is present for both revolver and term loans, and exists within all non-investment grade credit rating classes. Contrary to risk-based explanations of this finding, dual holder tranches are priced with premiums relative to other tranches of the same loan package. Dual holding premiums are higher when the equity-holder's stake is larger, when the dual-holder's share in the loan is larger, and when the equity holder is a hedge fund or a private equity fund. These premiums likely represent additional compensation to dual holders for providing capital to firms when the firms are having difficulty raising capital otherwise.

Suggested Citation

Lim, Jongha and Minton, Bernadette A. and Weisbach, Michael S., Equity-Holding Institutional Lenders: Do They Receive Better Terms? (February 2012). NBER Working Paper No. w17856. Available at SSRN: https://ssrn.com/abstract=2010388

Jongha Lim (Contact Author)

California State University - Fullerton ( email )

SGMH 5170
Fullerton, CA 92831
United States
657-278-7987 (Phone)

Bernadette Minton

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-3125 (Phone)
614-292-2359 (Fax)

Michael Weisbach

Ohio State University (OSU) - Department of Finance ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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