The value of repeat lending
by Blaise Gadanecz, Alper Kara and Philip Molyneux
Monetary and Economic Department
BIS Working Papers; No 350; July 2011
"...Because participant banks typically do not have the critical size, experience or desire to arrange loans themselves, they do not normally negotiate directly with the borrowing firm, but have more of an “arm’s-length” relationship acting through the arranger (Simons, 1993 and Sufi, 2007). In syndicated lending, participant banks depend heavily on arranger banks both before and after loan signing. The delegation of responsibility and reliance on arrangers leads to information asymmetries among syndicate members (Pichler and Wilhelm, 2001; Lee and Mullineaux, 2004; Jones et al., 2005; Sufi, 2007; Bharath et al., 2010; Ivashina, 2009; Focarelli et al. 2008)...."
"...From the point of view of information asymmetries and risk sharing, loan syndications are not unlike securitisations, where originators of structured products parcel out risk to a broad array of investors (CGFS (2003)). The originator of a securitisation may know more about the underlying assets than the investors who are called in to share the risk. There are, however, two important differences. Firstly, in securitisation, there is a pool of homogeneous assets bundled together on which the risk sharing takes place, while a syndicated loan is one single asset (contract), even if various tranches of the loan may be marketed to different lender classes. Secondly, in securitisation, there is a (vertical) slicing of risk, via an ordering of losses and guarantees of varying strength. The principle is that the least risk averse investors get hit by losses first and/or benefit from the least insurance, while the most risk averse ones get hit last and enjoy the strongest guarantees. In syndicated lending, there is no such slicing of risk, with all lenders getting hit at the same time (in proportion to their participation amounts) in case of default...."
"Recent studies have examined opportunistic behaviour by arrangers in loan syndications. Although these studies do explain the influence of asymmetric information on the structure and formation of the lending syndicates, they often do not use direct indicators of the lenders’ knowledge about the borrower. Rather, they rely on indirect indicators for arrangers’ and participants’ information sets that are contingent on syndicate size and arranger behaviour..."
"...when participant banks have information inferiority in the syndicate, higher spreads are charged. This is amplified when the borrowers are likely to be more opaque. Our results imply that participants with information inferiority consider possible arranger opportunistic behaviour in monitoring and therefore require higher spreads. The availability of borrower credit ratings significantly reduces information asymmetries and nullifies the impact of information set differences among arrangers and participants....