Liquidity in the Pricing of Syndicated Loans

Abstract

We examine whether banks price expected liquidity in U.S. syndicated term loans. Using extensive data we show that loans with higher expected liquidity have significantly lower spreads at origination, controlling for other determinants of loan spreads such as borrower, loan, syndicate and macroeconomic variables. A matched sample analysis of loans confirms our results. We therefore identify a new factor (expected liquidity) being priced in syndicated term loans, which results in annual savings of over $1.3 billion to the borrowers just in our sample. Thus, for the first time in the literature, we document a link between the secondary market liquidity of loans and their pricing in the primary market.

Keywords: Syndicated loans, loan secondary market, loan pricing, liquidity, loan trading

JEL Classification: G12, G21, G32