Lead Arrangers in Syndicated Loans

Abstract

In this paper, we model the first phase of the syndicated loan process by mapping it onto contract bidding theory. Our stylized cost model includes several costs components including the effort made by a candidate lender to be attractive to the borrower. This effort is then modeled as a function of a bidder-specific effect which encompasses past relationships, geographical proximity and industry relatedness as well as the presence of a full-underwriting clause. We also factor in the uncertainty associated with the transaction. We then empirically test the predictions of the model by analyzing the effect of past relationship, geographical and industrial specialization on the level of upfront fees that are reserved to lead arrangers only. All in all, our empirical results are consistent with the existing literature and the predictions of our stylized model.

Keywords: Lead arranger, Syndicated loans, Contract bidding theory, Pre-mandate phase

JEL Classification: G21, G23, G24, D86, C51