Form or Substance? Incomplete Disambiguation of Credit Grades in Syndicated Bank Loans
69 Pages Posted: 11 Nov 2020
Date Written: October 13, 2020
Corporate credit ratings have tightened in a very gradual but cumulatively substantial way over two decades. We examine its spillover effects in the spread of syndicated loans, the market for which features banks and institutional investors. We find that syndicated loan spreads do not fully correct for the ratings conservatism. The correction in spreads is greater for smaller, speculative borrowers, loans with fewer lenders and a greater lead bank share that resemble single lender loans, for borrower names with CDS, and in the CDS markets. The incomplete correction is also detectable in newly rated borrowers who did not earlier have ratings. Thus, even in markets without small retail participants, form, rather than substance alone, matters. The presence of large sophisticated players does not appear to guarantee outcomes that de-bias the biases built into simple aggregates such as ratings.
Keywords: Credit ratings, ratings conservatism, syndicated loans, bank specialness, ratings agencies, algorithmic bias
JEL Classification: G21, G24, G14, G12
Suggested Citation: Suggested Citation