Syndicated Loan Spreads and the Composition of the Syndicate

Posted: 10 Mar 2012 Last revised: 25 Feb 2016

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)

Multiple version iconThere are 2 versions of this paper

Date Written: October 14, 2012

Abstract

The past decade has seen significant changes in the structure of the corporate lending market, with non-bank institutional investors playing larger roles than they historically have played. These non-bank institutional lenders typically have higher required rates of return than banks, but invest in the same loan facilities. We hypothesize that non-bank institutional lenders invest in loan facilities that would not otherwise be filled by banks, so that the arranger has to offer a higher spread to attract the non-bank institution. In a sample of 20,031 leveraged loan facilities originated between 1997 and 2007, we find that, loan facilities including a non-bank institution in their syndicates have higher spreads than otherwise identical bank-only facilities. Contrary to risk-based explanations of this finding, non-bank facilities are priced with premiums relative to bank-only facilities of the same loan package. These premiums for non-bank facilities are substantially larger when a hedge or private equity fund is one of the syndicate members. Consistent with the notion that firms are willing to pay spread premiums when loan facilities are particularly important to the firm, we find that firms spend the capital raised by loan facilities piced at a premium faster than other loan facilities, especially when the premium is associated with a non-bank institutional investor.

Keywords: loan tranche, institutional investors, syndicated loan

JEL Classification: G3, G32, G21

Suggested Citation

Lim, Jongha and Minton, Bernadette A. and Weisbach, Michael S., Syndicated Loan Spreads and the Composition of the Syndicate (October 14, 2012). AFA 2013 San Diego Meetings Paper. Available at SSRN: https://ssrn.com/abstract=2019150 or http://dx.doi.org/10.2139/ssrn.2019150

Jongha Lim (Contact Author)

California State University - Fullerton ( email )

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

Bernadette A. 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 S. 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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