What Do Lead Banks Learn from Leveraged Loan Investors?

Abstract

We study the private information of nonbank lenders in leveraged loan deals. In these syndication deals, lead banks extract information from nonbank participants via bookbuilding and use this information to adjust loan spreads. We show that a one-percentage-point increase in loan spread during bookbuilding predicts a 3% higher probability of subsequent default. This result implies that the demand of syndicate participants reveals information about the borrower’s credit quality that is unknown to the lead bank before bookbuilding. Our finding challenges conventional narratives of information asymmetries between banks and nonbank investors and offers new implications on the efficiency of credit allocation.

Keywords: syndicated loans, leveraged loans, underwriting

JEL Classification: G23, G24, G30