Non-Fundamental Loan Renegotiations

Abstract

We examine whether non-fundamental improvements in secondary market trading conditions lead to renegotiations of syndicated loans. Exploiting a regression discontinuity design around the LSTA 100 index reconstitution, we find that loans included in the index are five times more likely to receive interest-rate-reducing amendments relative to comparable loans just below the threshold. Utilizing the within-loan-package interest rate variation, we confirm that these renegotiations are not driven by borrowers’ fundamentals. The threat of refinancing likely drives this effect, as our findings are more pronounced when institutional credit supply is higher and when loans are not subject to call protections.

Keywords: private loans, liquidity, renegotiation, non-fundamental demand, institutional lender demand, nonbank lenders, institutional investors, debt financing

JEL Classification: G11, G12, G21, G23, G32