1 Introduction 2 a Global Overview of the Syndicated Loans Market
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Notes 1 Introduction 1. See, for instance, Smith and Warner (1979), Smith (1980), Bester (1985), Besanko and Thakor (1987), Berger and Udell (1990), Eichengreen and Mody (2000) and Kleimeier and Megginson (2000). 2. See for instance, Sachs and Cohen (1982), Berlin and Loeys (1988), Berlin and Mester (1992) Eichengreen and Mody (1998), Bolton and Freixas (2000). 3. Removal of the claims from the bank’s balance sheet and purchase by a special-purpose vehicle (SPV) which issues securities that are subsequently serviced by the cash flow from the loans, allowing some tranching of the risk in the process. 4. Treasurers of large corporations often use loans and bonds as complementary means of financing. 2 A Global Overview of the Syndicated Loans Market 1. These bank roles, enumerated here in decreasing order of seniority, involve an active role in determining the syndicate composition, negotiating the pricing and administering the facility. 2. In practice, though, these rewards fail to materialise in a systematic manner. Indeed, anecdotal evidence for the US suggests that, for this reason, smaller players have withdrawn from the market lately and have stopped extending syndicated loans as a loss-leader. 3. For this discussion, it has to be recalled that the same bank can act in various capacities in a syndicate. For instance, the arranger bank can also act as an underwriter and/or allocate a small portion of the loan to itself and therefore also be a junior participant. 4. One should note that the fees shown in Figures 2.2 and 2.3 are not directly comparable. In Figure 2.2, for the purposes of comparability with spreads, annual and front-end fees are added together by annualizing the latter over the whole maturity of the facility, assuming full and immediate drawdown. Figure 2.3, on the other hand, shows annual and front-end fees separately without annualizing the latter. 5. For instance, it is very common nowadays for a medium-term loan provided by a syndicate to be refinanced by a bond at, or before, the loan’s stated matu- rity. Similarly, US commercial paper programmes are frequently backed by a syndicated letter of credit. 6. This provides an opportunity for risk-sharing between public and private sector investors. It usually takes the form of syndicated loans granted by multilateral agencies with tranches reserved for private sector bank lenders. 210 Notes 211 7. Transferability is determined by consent of the borrower, as stated in the original loan agreement. Some borrowers do not allow loans to be traded on the secondary market as they want to preserve their banking relationships. 8. The seller banks often enhance their fee income by arranging new loans to roll over the facilities they had previously granted to borrowers. They may sell old facilities on the secondary market to manage capacity on their bal- ance sheet, which is required to hold some of the new loans. 9. For example, minimum participation amounts on the primary market may exceed the bank’s credit limits. 10. Banks tend to trade blocks of loans when they restructure whole portfolios. In normal times, loan-by-loan trading is more common. 11. Nonetheless, Japanese banks have recently been very active in transferring loans on the Japanese secondary market. According to a quarterly survey conducted by the Bank of Japan, for the financial year April 2003–March 2004, such transfers totalled ¥11 trn, 38 per cent of which were non- performing loans. This was followed in the second quarter of 2004 by unusually weak secondary market activity by historical standards. 12. According to practitioners, major international banks with an Asian presence are among the main sellers of loans, while demand comes from Taiwanese and Chinese banks. 4 Borrowers-Country Economic Structure and the Pricing of Syndicated Loans 1. Guarantees, collateral, covenants can be thought of as risk mitigants. 2. In the case of loan facilities already funded by the lenders but not yet signed, the funding date was taken as a reference. 3. This sample size is considerably larger than in several other studies analysing the determinants of developing country credit spreads; Edwards (1986) and Kamin and von Kleist (1999) use 113 and 358 loan spread observations, respectively. 4. This includes both private and public debt. 5. Nevertheless, Balassa (1986) also demonstrates that while outward-oriented countries accepted a temporary decline in economic growth in the immedi- ate aftermath of external economic shocks in order to limit reliance on for- eign borrowing, their economic growth accelerated subsequently, owing to the output-increasing policies applied. 6. Although this may not be an indispensable condition if credit derivatives are used. 7. A club deal is reserved for a limited number of insider banks instead of being widely sold down on the market; in a bilateral deal, there is only one participant bank. 8. The comprehensive sample is approximately equal to the population. 9. Linneman (1980) estimates property values and rental payments for the urban housing market that are hedonic functions of neighbourhood (non- structural) and structural traits associated with each site. The partial deriva- tive of these hedonic functions with respect to any trait describes the marginal change in the total site valuation associated with a change in that 212 Notes trait when all other trait levels are held constant. These partial derivatives reveal the same marginal information as do prices in standard market analy- ses; for this reason, partial derivatives are often referred to as the ‘shadow prices’ of the underlying locational traits. 10. Surely the effects of this variable are not limited to the year of signature of the loan. The results reported in this chapter use an IMF-assistance dummy equal to 1 if Fund assistance was received during the year of signature of the loan. An alternative model specification (not shown) with a dummy for Fund assistance preceding the year of signature of the loan gives very similar results. 11. See n. 12. 12. The estimation results on this variable as well as on the ratio of reserves to GDP could be influenced by endogeneity issues; caution should therefore be exercised in their interpretation. 13. This interpretation is also known as ‘survival bias’. 14. In fact, the dummy for large syndicate sizes is significant and positive when macroeconomic conditions are also controlled for – see the right-hand column of Table 4.9. 15. See Appendix 4.2 for the full list of sectors included. 16. In addition, a fourth model specification was run using a partial forward-stepwise estimation technique. An F-test was first performed, which found the four sovereign ratings dummies corresponding to the whole S&P ratings spec- trum described in Appendix 4.1 – less the ‘default, not rated or not disclosed’ rating class – to be jointly significant determinants of the drawn return at the 1 per cent level. These sovereign ratings dummies were subsequently forced into the model together with microeconomic variables. Meanwhile, progressing from the specific to the general, the macroeconomic variables were chosen by means of forward-stepwise selection, using an entry criterion of 10 per cent significance and a removal criterion of 11 per cent. The results (available from the authors upon request) are very similar to the combined macro–micro model presented in Table 4.9 without sovereign ratings that uses OLS. Macroeconomic variables (with the exception of the inflation rate and the ratio of imports to exports), as well as sovereign ratings, are significant with the correct sign (favourable sovereign ratings dummies are negative and significant and vice versa). This confirms that there is information contained in macroeconomic variables that is not captured in sovereign ratings. 5 Lender Behaviour and the Structure and Pricing of Syndicated Loans 1. See n. 3 in chapter 7 for a definition of leveraged lending. 2. Insurance companies, pension funds and CDO arbitrage funds have become buyers of syndicated loans, especially on the leveraged and highly leveraged segments. 3. For example, loan size and maturity; borrower rating; bank size and business mix. 4. This is so despite the existence of information sources (such as credit reports and real estate appraisals) which national and local lenders can access with equal ease. But local institutions may have – among other information – credit repayment histories of the mortgagor, information on local default Notes 213 rates, as well as specific legal knowledge allowing for lower servicing and origination costs. 5. See the paper by Degryse and Ongena (2002) for a comprehensive review of the distance literature. 6. Most previous studies have relied on regulatory and hence national databases. 7. Consider a syndicated credit facility granted by a syndicate consisting of Société Générale and Crédit Lyonnais. Two observations are entered for that facility into the regression. One will comprise Société Générale’s balance sheet and profit and loss statement indicators, the other one will feature the same characteristics for Crédit Lyonnais. Both observations will carry the same loan transaction characteristics. 8. Tier 2 capital is not examined separately. This also follows the approach used in seminal work on the bank lending channel by Kishan and Opiela (2000). 9. A zero share was entered in case the senior bank had sold down all the loan to junior participants. 10. Collateral has a cost (Bester, 1985) so it may also be the case that the cost of arranging or warehousing the collateral is charged for in the price of the loan (Freixas and Rochet, 1997). Otherwise, financing constraints facing the bor- rower may be such that he accepts both collateral and a higher spread. Smith and Warner (1979) argue that collateralization is costly and that the benefits to securing the loan must exceed the cost for a particular loan to be secured.