Syndicated Credit Cut and Firm Performance

Abstract

We employ a unique data set that tracks the changes of each lender’s share commitment in each syndicated credit facility in each year to study the relationship between credit cuts and the borrowing firms’ future performance. Overcoming the crucial data limitations in prior empirical studies of loan sales and securitization, our data set allows us to differentiate between different types of credit cuts (e.g., credit sale vs. credit reduction, loan sale vs. loan reduction, credit cuts by agent and non-agent lenders, and credit cuts by banks and non-bank lenders). We find that adverse selection and moral hazard problems are less severe than commonly believed in syndicated loan sales. When examining the causes of different types of credit cuts, we find credit cuts are less likely to be driven by credit quality problems or information asymmetry but are more likely to be driven by lenders’ funding needs and liquidity shocks to the lenders. In addition, credit sales are partially driven by demand for high-yield performing loans from institutional investors. Finally, the ability of the buyers to pick loans with performing internal ratings suggests that lenders have shared their private information with the buyers during the due diligence process. These findings help explain why credit cuts have no effects on firm default probability after we control for public information.

Keywords: syndicated credit cut, credit sale, credit reduction, information asymmetry, adverse selection, moral hazard

JEL Classification: G21, G20, G23, G33, G14