Syndicated bank lending and rating downgrades: When do sovereign ceiling policies really matter?

Abstract

We examine the effect of firm credit rating downgrades on the pricing and structure of syndicated bank loans following rating downgrades in the firms’ countries of domicile. We find that the sovereign ceiling policies used by credit rating agencies create a disproportionally adverse impact on the bounded firms’ borrowing costs relative to other domestic firms following their sovereign’s rating downgrade. Moreover, the loans extended tend to be more concentrated and funded by fewer lead arrangers. Forming borrowing relationships with local- as well as foreign-banks and maintaining financial strength ameliorates bounded firms’ bank financing costs.

Keywords: Credit ratings, Sovereign ceiling, Bank credit, Relationship lending, Foreign-currency lending, Firm credit constraints

JEL Classification: F34, G21, G24, G28, G32, H63