The Impact of Private Equity Sponsors on Syndicated Loans

Abstract

Sponsored loans are issued with the assistance of private equity firms, which negotiate terms on behalf of the borrower. We analyze the impact of engaging private equity sponsors on the cost of syndicated loans and the value added by loan sponsors. We find that sponsorship is associated with complex transactions with syndicates, issues with greater degree of information asymmetry and issues without covenants and lower credit ratings. As such, the cost of the loans with sponsors is higher on the average than those without sponsors. Stock price reaction to syndicated loans is positive and significant, and it is more pronounced for sponsored syndicated loans. Although sponsored debts cost more than non-sponsored debts, the sponsors help to bring the debt issue to the market, which might not happen otherwise.

Keywords: Private Equity, Syndicated Loans