Contracting in the Dark: The Rise of Public-Side Lenders in the Syndicated Loan Market

Abstract

We document a novel trend in syndicated lending where some participants voluntarily waive their rights to borrowers’ private information. We posit that “public-side” lending emerged to facilitate broad lender participation in the syndicated loan market by mitigating concerns about the leakage of borrowers’ private information into public securities markets. In line with this proposition, we find that public-side lending facilitates the loan market participation of lenders for which maintaining robust information barriers is particularly costly. Furthermore, while public-side lending increases within-syndicate information asymmetry, our findings indicate that it does not materially increase interest spreads and is associated with lower coordination costs among syndicate participants. Collectively, we document how debt contracting practices evolved to address frictions associated with the protection of borrowers’ private information and the related changes in loan contracting equilibria.

Keywords: public-side lenders, private information, information barriers, institutional investors, syndicated lending, information asymmetry