Pipeline Risk in Leveraged Loan Syndication

76 Pages Posted: 26 Apr 2017

See all articles by Max Bruche

Max Bruche

Humboldt University of Berlin

Frederic Malherbe

University College London - Department of Economics

Ralf R. Meisenzahl

Federal Reserve Board

Multiple version iconThere are 2 versions of this paper

Date Written: 2017-04-06

Abstract

Leveraged term loans are typically arranged by banks but distributed to institutional investors. Using novel data, we find that to elicit investors' willingness to pay, arrangers expose themselves to pipeline risk: They have to retain larger shares when investors are willing to pay less than expected. We argue that the retention of such problematic loans creates a debt overhang problem. Consistent with this, we find that the materialization of pipeline risk for an arranger reduces its subsequent arranging and lending activity. Aggregate time series exhibit a similar pattern, which suggests that the informational friction we identify could amplify the credit cycle.

Keywords: Debt Overhang, Lead Arranger Share, Leveraged Loans, Pipeline Risk, Syndicated Loans

JEL Classification: G23, G24, G30

Suggested Citation

Bruche, Max and Malherbe, Frederic and Meisenzahl, Ralf R., Pipeline Risk in Leveraged Loan Syndication (2017-04-06). FEDS Working Paper No. 2017-048. Available at SSRN: https://ssrn.com/abstract=2958675 or http://dx.doi.org/10.17016/FEDS.2017.048

Max Bruche (Contact Author)

Humboldt University of Berlin ( email )

Spandauer Str. 1
Berlin, D-10099
Germany

HOME PAGE: http://www.maxbruche.net

Frederic Malherbe

University College London - Department of Economics ( email )

Drayton House, 30 Gordon Street
30 Gordon Street
London, WC1H 0AX
United Kingdom

Ralf R. Meisenzahl

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States

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