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The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees

49 Pages Posted: 2 Nov 2012 Last revised: 3 Apr 2015

Tobias Berg

Frankfurt School of Finance & Management

Anthony Saunders

New York University - Leonard N. Stern School of Business

Sascha Steffen

Frankfurt School of Finance & Management

Date Written: April 2, 2015

Abstract

More than 80% of U.S. syndicated loans contain at least one fee type and contracts typically specify a menu of spreads and fee types. We test the predictions of existing theories on the main purposes of fees and provide supporting evidence that: (1) fees are used to price options embedded in loan contracts such as the drawdown option for credit lines and the cancellation option in term loans, and (2) fees are used to screen borrowers based on the likelihood of exercising these options. We also propose a new total-cost-of-borrowing measure that includes various fees charged by lenders.

Keywords: Options and syndicated loans, fees, asymmetric information

JEL Classification: G20, G21, G32

Suggested Citation

Berg, Tobias and Saunders, Anthony and Steffen, Sascha, The Total Cost of Corporate Borrowing in the Loan Market: Don't Ignore the Fees (April 2, 2015). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2169642 or http://dx.doi.org/10.2139/ssrn.2169642

Tobias Berg (Contact Author)

Frankfurt School of Finance & Management ( email )

Sonnemannstra├če 9-11
Frankfurt am Main, 60314
Germany

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Sascha Steffen

Frankfurt School of Finance & Management ( email )

Sonnemannstr. 9 -11
Frankfurt, 60314
Germany

HOME PAGE: http://www.sascha-steffen.de

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