Creditor Rights, Enforcement, and Debt Ownership Structure: Evidence from the Global Syndicated Loan Market

Abstract

This paper examines the relation between legal risk - defined as the strength and enforcement of creditors' rights - and debt ownership concentration to understand the various governance roles played by banks as large creditors. Using a sample of 495 project finance loan tranches (worth $151 billion) to borrowers in 61 different countries, we document high absolute levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical loan tranche. We also show that syndicates in countries with weak creditor rights and poor legal enforcement are larger and more diffuse. Based on this finding, we conclude that lenders structure loan syndicates to facilitate monitoring and low-cost re-contracting in countries where creditors have strong and enforceable legal rights. In contrast, lenders attempt to deter strategic defaults by creating larger and more diffuse syndicates when they cannot resort to legal enforcement mechanisms to protect their claims.

Keywords: creditor rights, international corporate governance, bank lending, project finance, syndication

JEL Classification: G21, G32, F34, K33