Syndicated Loan Spreads and the Composition of the Syndicate

Abstract

During the past decade non-bank institutional investors are increasingly taking larger roles in the corporate lending 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. In a sample of 20,031 leveraged loan facilities originated between 1997 and 2007, 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 premia relative to bank-only facilities in the same loan package. These non-bank premia 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 a premium when loan facilities are particularly important to them, the non-bank premia are larger when borrowing firms face financial constraints and when capital is less available from banks.

Keywords: hedge funds, syndicated loans, spread premiums

JEL Classification: G21, G23, G32