DOCSLIB.ORG

Corporate Ownership Structure and Bank Loan Syndicate Structure$

Total Page：16

File Type：pdf, Size：1020Kb

Download full-text PDF Read full-text
Corporate Ownership Structure and Bank Loan Syndicate Structure$ Journal of Financial Economics ] (]]]]) ]]]–]]] Contents lists available at SciVerse ScienceDirect Journal of Financial Economics journal homepage: www.elsevier.com/locate/jfec Corporate ownership structure and bank loan syndicate structure$ Chen Lin a, Yue Ma b, Paul Malatesta c,n, Yuhai Xuan d a Chinese University of Hong Kong, Shatin, N. T., Hong Kong b Lingnan University, Tuen Mun, Hong Kong c University of Washington, Seattle, WA, USA d Harvard Business School, Boston, MA, USA article info abstract Article history: Using a novel data set on corporate ownership and control, we show that the divergence Received 17 December 2010 between the control rights and cash-flow rights of a borrowing firm’s largest ultimate Received in revised form owner has a significant impact on the concentration and composition of the firm’s loan 7 March 2011 syndicate. When the control-ownership divergence is large, lead arrangers form syndicates Accepted 14 March 2011 with structures that facilitate enhanced due diligence and monitoring efforts. These syndicates tend to be relatively concentrated and composed of domestic banks that are JEL classification: geographically close to the borrowing firms and that have lending expertise related to the G21 industries of the borrowers. We also examine factors that influence the relation between G32 ownership structure and syndicate structure, including lead arranger reputation, prior G34 lending relationship, borrowing firm informational opacity, presence of multiple large owners, laws and institutions, and financial crises. Keywords: & Ownership structure 2011 Elsevier B.V. All rights reserved. Excess control rights Syndicated loans 1. Introduction borrowing in international bond markets (Chui, Domanski, Kugler, and Shek, 2010). Unlike a traditional bank loan, Over the past two decades, the syndicated loan market which typically involves a single creditor, a syndicated loan has become the most important source of global corporate unites a group of lenders in which a lead arranger originates financing. International syndicated lending amounted to the loan and performs due diligence and monitoring, and $1.8 trillion in 2009, surpassing the $1.5 trillion of corporate the participant banks fund parts of the loan (Esty, 2001). The syndication process therefore generates an additional ele- ment of moral hazard within the syndicate between the $ lead arranger and the other syndicate members, besides We are grateful for helpful comments and suggestions from Stijn Claessens, Ben Esty, Stuart Gilson, Paul Gompers, Joel Houston, Victoria the typical agency problems between the borrower and the Ivashina, Christopher James, Simon Johnson, Rafael La Porta, Ross Levine lender that exist in a lending relationship (Diamond, 1984; (the referee), Bill Schwert (the editor), Andrei Shleifer, Laura Starks, Holmstrom and Tirole, 1997). Despite the importance of Jeremy Stein, Bele´n Villalonga, Yihui Wang, and seminar participants at syndicated loans and the uniqueness of the syndication Zhongnan University of Economics and Law, the American Finance Association Annual Meeting, the Asian Finance Association International process, little is known about how loan syndicates are Conference, and the China International Conference in Finance. We structured to address and mitigate moral hazard problems thank Arbitor Ma, Pennie Wong, and William Alden for help with data both at the borrowing firm and within the syndicate. collection. Lin and Xuan gratefully acknowledge financial support from In this paper, we focus on the divergence between Chinese University of Hong Kong and the Division of Research of the corporate ownership and control at the borrowing firm to Harvard Business School, respectively. n Corresponding author. explore how corporate ownership structure influences the E-mail address: [email protected] (P. Malatesta). bank loan syndicate structure. In many publicly listed 0304-405X/$ - see front matter & 2011 Elsevier B.V. All rights reserved. doi:10.1016/j.jfineco.2011.10.006 Please cite this article as: Lin, C., et al., Corporate ownership structure and bank loan syndicate structure. Journal of Financial Economics (2012), doi:10.1016/j.jfineco.2011.10.006 2 C. Lin et al. / Journal of Financial Economics ] (]]]]) ]]]–]]] firms around the world, control rights of the dominant costly (Gertner and Scharfstein, 1991; Bolton and Scharfstein, shareholders often exceed their cash-flow rights via the 1996; Brunner and Krahnen, 2008). As a consequence, diffuse use of dual-class shares, pyramidal structures, and multiple loan ownership can be used as a pre-commitment mechan- control chains (e.g., La Porta, Lo´pez-de-Silanes, and Shleifer, ism by lenders to deter strategic defaults (Bolton and 1999; Claessens, Djankov, and Lang, 2000; Laeven and Scharfstein, 1996; Esty and Megginson, 2003). Therefore, if Levine, 2008, 2009; Gompers, Ishii, and Metrick, 2010). In creditors are concerned with strategic defaults by the bor- such firms, the controlling shareholders have the ability to rowing firms when a large divergence exists between divert corporate wealth for private benefits without bearing corporate control and cash-flow rights, a diffuse syndicate the full financial consequences and, therefore, have strong ownership might be preferred. In this regard, the creditors’ incentives to engage in tunneling and other moral hazard incentives to form a more diffuse syndicate might be activities (Shleifer and Vishny, 1997; Johnson, La Porta, increasing in the divergence between corporate control and Lo´pez-de-Silanes, and Shleifer, 2000).1 Many of these activ- cash-flow rights. These considerations suggest a negative ities increase the default risks, impair collateral values and, relation between corporate control-ownership divergence as a consequence, increase the expected costs of financial and syndicate concentration. The overall effect of corporate distress (Lin, Ma, Malatesta, and Xuan, 2011).2 In anticipation control-ownership divergence on syndicate concentration is of the increased credit risk, more intense due diligence and an empirical question that we explore in this study. monitoring efforts are required before lending takes place. The divergence between ownership and control at the However, as suggested in the framework of Holmstrom and borrowing firm can also affect the composition of the loan Tirole (1997), the lead arranger has an incentive to shirk the syndicate, including foreign lender participation and the monitoring responsibilities, especially when more intense overall lending expertise of the syndicate members. It is monitoring is required, because the monitoring efforts are well documented that greater physical distance between costly and unobservable, and the lead arranger owns only the lender and the borrower makes the ex-ante screening part of the loan. The lead arranger bears most of the costs for and ex-post monitoring more difficult and generates the due diligence on the borrower ex ante and the monitor- higher agency costs (Stein, 2002; Esty, 2004). The dis- ing of the borrower ex post yet retains only a fraction of the tance-driven agency costs are further aggravated by the loan. Therefore, the lead arranger could lack the incentive to agency problems induced by the control-ownership diver- provide the optimal level of efforts (Sufi, 2007; Ivashina, gence at the borrowing firms. As a result, foreign banks 2009). Participant banks should take the lead arranger’s might be less willing to lend to such firms that require moral hazard problem into account and demand that a monitoring-intensive relationship loans. Moreover, as greater fraction of the loan be held by the lead arranger for Esty (2004) suggests, foreign banks are more susceptible incentive purposes if the borrowing firm requires more due to expropriation risks because they are often treated diligence and monitoring. Moreover, a larger portion of the unfairly in corporate default situations, especially in loan retained by the lead arranger not only signals a credible relational functions such as debt restructuring or collat- commitment by the lead arranger in due diligence and eral seizing.3 Therefore, we expect the syndicate partici- monitoring, but also provides a strong signal of borrower pation rate of foreign lenders to be negatively related to quality (Sufi, 2007; Ivashina, 2009). Therefore, the fraction the divergence between control and cash-flow rights of held by the lead arranger of a syndicated loan should be the dominant shareholders of the borrower. increasing in the divergence between control and cash-flow The lending expertise of the syndicate also could be rights of the borrowing firm’s dominant shareholders. It affected by the divergence between ownership and control follows that syndicates lending to firms with large control- at the borrowing firm. Lender loan portfolio concentration ownership deviations should be more concentrated than in a particular industry is driven by synergies in information those lending to firms with small deviations. collection and monitoring (Ivashina, 2009). Banks with On the other hand, countervailing factors could induce a industry-specific expertise are more likely than other banks diffuse syndicate structure in the face of control-ownership to lend to borrowers that require industry-specific knowl- divergence. Diffuse loan ownership can facilitate diversifica- edge and intense monitoring, such as firms with great tion of risk exposure across lenders (Esty and Megginson, tunneling risks caused by large divergences between own- 2003).
Load more

Recommended publications
  • Syndicated Loan Market
    Syndicated Loan Market Loan Syndications and Trading Association Bram Smith – [email protected] (Executive Director) Elliot Ganz – [email protected] (General Counsel) LSTA member distribution 125 100 75 50 LSTA member firms 25 0 Institutional Investors Banks Law Firms Service Providers The Loan Syndications and Trading Association is the trade association for the floating rate corporate loan market. The LSTA promotes a fair, orderly, and efficient corporate loan market and provides leadership in advancing the interest of all market participants. The LSTA undertakes a wide variety of activities to foster the development of policies and market practices designed to promote just and equitable marketplace principles and to encourage cooperation and coordination with firms facilitating transactions in loans and related claims. 2 U.S. Corporate loan market is a vital source Of capital for American business U.S. Corporate loan and loan commitments outstanding U.S. Corporate loans outstanding Commits/outstandings ($Bils.) Held by non-banks According to government data, the U.S. syndicated loan market totals roughly $2.5 trillion of committed lines and outstanding loans The committed lines are loans in the form of revolvers – they can be drawn, repaid, drawn, repaid, etc. It is a key source of financing for many large and middle market companies in the U.S. Over one-third of outstanding loans are held by non-banks; half of those are held by CLOs Source: Shared National Credit Review U.S. syndicated lending volume U.S. syndicated lending volume Loan volume($Bils.) Investment grade loans are often undrawn revolvers that backstop commercial paper programs for companies like IBM; they are held almost exclusively by banks.
    [Show full text]
  • NBER WORKING PAPER SERIES VOLATILITY in INTERNATIONAL FINANCIAL MARKET ISSUANCE: the ROLE of the FINANCIAL CENTER Marco Cipriani
    NBER WORKING PAPER SERIES VOLATILITY IN INTERNATIONAL FINANCIAL MARKET ISSUANCE: THE ROLE OF THE FINANCIAL CENTER Marco Cipriani Graciela L. Kaminsky Working Paper 12587 http://www.nber.org/papers/w12587 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 October 2006 This paper was in part written while Cipriani was visiting the European Institute in Florence and Kaminsky was a visiting scholar at the Hong Kong Monetary Authority. We thank both institutions for their hospitality. We thank the Center for the Study of Globalization at George Washington University for financial support. We also thank Pablo Vega-Garcia for excellent research assistance. The views expressed here are those of the authors and not necessarily those of the Hong Kong Monetary Authority or the National Bureau of Economic Research. © 2006 by Marco Cipriani and Graciela L. Kaminsky. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Volatility in International Financial Market Issuance: The Role of the Financial Center Marco Cipriani and Graciela L. Kaminsky NBER Working Paper No. 12587 October 2006 JEL No. F3 ABSTRACT We study the pattern of volatility of gross issuance in international capital markets since 1980. We find several short-lived episodes of high volatility. Over the long run, however, volatility has declined, suggesting that international financial integration has not made financial markets more erratic. We use VAR analysis to examine the determinants of the time-varying pattern of volatility, focusing in particular on the role of financial centers.
    [Show full text]
  • No 946 the Pricing of Carbon Risk in Syndicated Loans: Which Risks Are Priced and Why? by Torsten Ehlers, Frank Packer and Kathrin De Greiff
    BIS Working Papers No 946 The pricing of carbon risk in syndicated loans: which risks are priced and why? by Torsten Ehlers, Frank Packer and Kathrin de Greiff Monetary and Economic Department June 2021 JEL classification: G2, Q01, Q5. Keywords: environmental policy, climate policy risk, transition risk, loan pricing. BIS Working Papers are written by members of the Monetary and Economic Department of the Bank for International Settlements, and from time to time by other economists, and are published by the Bank. The papers are on subjects of topical interest and are technical in character. The views expressed in them are those of their authors and not necessarily the views of the BIS. This publication is available on the BIS website (www.bis.org). © Bank for International Settlements 2021. All rights reserved. Brief excerpts may be reproduced or translated provided the source is stated. ISSN 1020-0959 (print) ISSN 1682-7678 (online) The pricing of carbon risk in syndicated loans: which risks are priced and why?1 Torsten Ehlers, Frank Packer and Kathrin de Greiff 2 Abstract Do banks price the risks of climate policy change? Combining syndicated loan data with carbon intensity data (CO2 emissions relative to revenue) of borrowers across a wide range of industries, we find a significant “carbon premium” since the Paris Agreement. The loan risk premium related to CO2 emission intensity is apparent across industries and broader than that due simply to “stranded assets” in fossil fuel or other carbon-intensive industries. The price of risk, however, appears to be relatively low given the material risks faced by borrowers.
    [Show full text]
  • Corporate Loan Spreads and Economic Activity∗
    Corporate Loan Spreads and Economic Activity∗ Anthony Saunders Alessandro Spina Stern School of Business, New York University Copenhagen Business School Daniel Streitz Sascha Steffen Copenhagen Business School Frankfurt School of Finance & Management Danish Finance Institute May 17, 2021 Abstract We use secondary corporate loan market prices to construct a novel loan market-based credit spread. This measure has additional predictive power across macroeconomic outcomes beyond existing bond credit spreads as well as other commonly used predic- tors in both the U.S. and Europe. Consistent with theoretical predictions, our evidence highlights the joint role of financial intermediary and borrower balance sheet frictions. In particular, loan market borrowers are compositionally different from bond mar- ket borrowers, which helps explain the differential predictive power of loan over bond spreads. Exploiting industry specific loan spreads and alternative weighting schemes further improves our business cycle forecasts. JEL classification: E23, E44, G20 Keywords: Credit spreads, Secondary loan market, Bonds, Credit supply, Business cycle ∗Corresponding author: Sascha Steffen, Frankfurt School of Finance & Management, Adickesallee 32-34. 60322 Frankfurt, Germany. E-mail: s.steff[email protected]. We thank Klaus Adam, Ed Altman, Yakov Amihud, Giovanni Dell’Ariccia, Tobias Berg, Nina Boyarchenko, Jennifer Carpenter, Itay Goldstein, Arpit Gupta, Kose John, Toomas Laaritz, Yuearan Ma, Atif Mian, Emanuel Moench, Holger Mueller, Martin Oehmke, Cecilia Palatore, Carolin
    [Show full text]
  • The Future of Financial Infrastructure an Ambitious Look at How Blockchain Can Reshape Financial Services
    The future of financial infrastructure An ambitious look at how blockchain can reshape financial services An Industry Project of the Financial Services Community | Prepared in collaboration with Deloitte Part of the Future of Financial Services Series • August 2016 Foreword Consistent with the World Economic Forum’s mission of applying a multistakeholder approach to address issues of global impact, creating this report involved extensive outreach and dialogue with the Financial Services Community, Innovation Community, Technology Community, academia and the public sector. The dialogue included numerous interviews and interactive sessions to discuss the insights and opportunities for collaborative action. Sincere thanks to the industry and subject matter experts who contributed unique insights to this report. In particular, the members of this Financial Services Community project’s Steering Committee and Working Group, who are introduced in the Acknowledgements section, played an invaluable role as experts and patient mentors. We are also very grateful to Deloitte Consulting LLP in the US, an entity within the Deloitte1 network, for its generous commitment and support in its capacity as the official professional services adviser to the World Economic Forum for this project. Contact For feedback or questions: R. Jesse McWaters [email protected] +1 (212) 703 6633 1 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee (“DTTL”), its network of member firms, and their related entities. DTTL and each of its member firms are legally separate and independent entities. DTTL (also referred to as “Deloitte Global”) does not provide services to clients. Please see www.deloitte.com/about for a more detailed description of DTTL and its member firms.
    [Show full text]
  • CDD and AML Monitoring in Syndicated Lending
    CDD and AML monitoring in syndicated lending tltsolicitors.com/insights-and-events/insight/cdd-and-aml-monitoring-in-syndicated-lending Part two in a series of six highlighting some of the key legal issues that can arise throughout the life of a syndicated loan facility. In this article we examine how the UK's anti-money laundering regime impacts initial Know Your Customer (KYC) and ongoing Customer Due Diligence (CDD) requirements in the syndicated lending market. We will also look at the practical impact GDPR has had on the CDD process over the last year. Overview – a risk-based approach Lenders will be aware of the risk-based approach adopted in the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (the 2017 Regulations) which came into force on 26 June 2017. The difficulty or the benefit depending on your perspective, of a risk-based approach is that no one size fits all. Each firm must carry out its own risk assessment by reference to its customers, products or services, transactions, delivery channels and geographical areas of operation. When considering their policies, lenders can have regard to the (non-exhaustive) Risk Factor Guidelines issued by the European Supervisory Authorities as well as the sector specific guidance from the Joint Money Laundering Steering Group (JMLSG). In addition there is the FCA's Financial Crime Guide which applies to regulated firms. This guide is non- binding and utilises the same risk-based proportionality approach found in the 2017 Regulations. With the regulatory spotlight on this area, it is important to adhere to these regulatory obligations throughout the lifecycle of the customer relationship.
    [Show full text]
  • Not Created Equal: Surveying Investments in Non-Investment Grade U.S
    Winter 2016 Not created equal: Surveying investments in non-investment grade U.S. corporate debt Institutional investors seeking yield and current income opportunities have increased their allocations to non-investment grade corporate bonds and loans over the last several years. It is not hard to make the case for investing in these assets with the 10-year Treasury hovering around 2% and with historically low rates across the yield curve. Non-investment grade U.S. corporate debt has historically produced yields in the 6-10% range or greater. And with default rates below their long-term averages, it is not surprising that investment capital has poured into non-investment grade assets, especially as worries over low interest rates continue to persist. But while delivering much-needed yield with manageable levels of risk, non-investment grade corporate debt is far from a monolithic asset class. There are several categories that investors can choose from, and they are markedly different from each other—both in terms of market dynamics and the underlying risk/return profile of the investments. Furthermore, as the credit cycle has shifted into a period of higher volatility, rising defaults and potentially rising rates, now is a good time for investors to consider the differences among the sub- asset classes of non-investment grade debt and determine which strategies best match their long-term objectives. The many flavors of leveraged lending We can illustrate the different risk/return attributes and the drivers of performance in each of the asset classes by putting the main asset classes of U.S.
    [Show full text]
  • Construction Loan Syndication and Participation Issues
    CONSTRUCTION LOAN SYNDICATION AND PARTICIPATION ISSUES American Bar Association Section of Real Property, Probate and Trust Law 13th Annual Spring CLE and Council Meeting April 24-28, 2002 Westin St. Francis Hotel San Francisco, California American Bar Association Annual Meeting August 8-13, 2002 Washington, D.C. Advanced Real Estate Law Course Texas Bar Association July 10-12, 2003 Hill Country Hyatt Regency Hotel San Antonio, Texas Construction Loan Syndication and Participation Issues Table of Contents 1. Making Borrowers and Lenders Comfortable in Construction Loan Syndications and Participations. 1.1 Shift to Syndications in the late 1990's 1.2 Basic Legal Differences 1.3 Basic Practical Differences 2. The Funding Issue 2.1 The Practical Perspective 2.2 Participations 2.3 Dealing with the Defaulting Lender in a Syndication 2.3.1 Administrative Agent Advances 2.3.2 Defaulting Lender Provisions 2.3.2.1 Quick Default Determination 2.3.2.2 Electing Lenders 2.3.2.3 Application of Payments/Indemnification 2.3.2.4 Voting and Ownership Percentage Adjustments 2.3.2.5 Removal and Replacement 2.3.2.6 Extreme Protection 3. The Day-to-Day Management Issue 3.1 The Problem with Multiple Lender Approval 3.2 Lead Lender/Administrative Agent Role/Discretion 3.3 Participant/Syndicate Lender Concerns/Approval Rights 4. The Liability and Removal Issue 4.1 Lead Lender in a Participation 4.2 Administrative Agent in a Syndication 4.3 The 50/50 Deal Problem 4.4 The Administrative Agent is not the Lender's "Deep Pocket" 4.5 Rattling the Gross Negligence/Willful Misconduct Chain 5.
    [Show full text]
  • Evidence from the Global Syndicated Loan Market
    ECB LAMFALUSSY FELLOWSHIP WORKING PAPER SERIES PROGRAMME NO 1066 / JULY 2009 UNIVERSAL BANKS AND CORPORATE CONTR OL EVIDENCE FROM THE GLOBAL SYNDICATED LOAN MARKET by Miguel A. Ferreira and Pedro Matos WORKING PAPER SERIES NO 1066 / JULY 2009 ECB LAMFALUSSY FELLOWSHIP PROGRAMME UNIVERSAL BANKS AND CORPORATE CONTROL EVIDENCE FROM THE GLOBAL SYNDICATED LOAN MARKET 1 by Miguel A. Ferreira 2 and Pedro Matos 3 In 2009 all ECB publications This paper can be downloaded without charge from feature a motif http://www.ecb.europa.eu or from the Social Science Research Network taken from the €200 banknote. electronic library at http://ssrn.com/abstract_id=1427233. 1 Any views expressed are only those of the authors and do not necessarily represent the views of the European Central Bank or the Eurosystem. 2 Faculdade de Economia, Universidade Nova de Lisboa, Rua Marques da Fronteira 20, Lisboa, 1099-038, Portugal; e-mail: [email protected] 3 Marshall School of Business, University of Southern California, 3670 Trousdale Parkway, BRI 308, Los Angeles, CA 90089-0804, USA; e-mail: [email protected] Lamfalussy Fellowships This paper has been produced under the ECB Lamfalussy Fellowship programme. This programme was launched in 2003 in the context of the ECB-CFS Research Network on “Capital Markets and Financial Integration in Europe”. It aims at stimulating high-quality research on the structure, integration and performance of the European financial system. The Fellowship programme is named after Baron Alexandre Lamfalussy, the first President of the European Monetary Institute. Mr Lamfalussy is one of the leading central bankers of his time and one of the main supporters of a single capital market within the European Union.
    [Show full text]
  • Syndicated Loan Facilities: Non-Bank Lenders, and the Influence of Credit Derivatives: Current Issues and Opportunities for Borrowers
    The Association of Corporate Treasurers Syndicated loan facilities: non-bank Lenders, and the influence of credit derivatives: current issues and opportunities for Borrowers Part 2 Produced with assistance and sponsorship from London, July 2007 This document may be freely quoted with acknowledgement The Association of Corporate Treasurers The ACT is the international body for finance professionals working in treasury, risk and corporate finance. Through the ACT we come together as practitioners, technical experts and educators in a range of disciplines that underpin the financial security and prosperity of an organisation. The ACT defines and promotes best practice in treasury and makes representations to government, regulators and standard setters. We are also the world’s leading examining body for treasury, providing benchmark qualifications and continuing development through education, training, conferences, and publications, including The Treasurer magazine. Our 3,500 members work widely in companies of all sizes through industry, commerce and professional service firms. For further information visit www.treasurers.org. Guidelines about our approach to policy and technical matters are available at www.treasurers.org/technical/resources/manifestoMay2007.pdf. This briefing note was drafted by Slaughter and May for the ACT’s Policy and Technical Department (e-mail: [email protected]) and commented on by members of the Policy and Technical Committee and others to all of whom thanks are due. NOTE Although the ACT and Slaughter and May have taken all reasonable care in the preparation of this guide, no responsibility is accepted by the ACT or Slaughter and May for any loss, however caused, occasioned to any person by reliance on it.
    [Show full text]
  • The Loan Syndications and Trading Association
    July 22, 2019 Via Electronic Filing Mr. Paul Cellupica, Esquire Deputy Director and Chief Counsel Division of Investment Management U.S. Securities and Exchange Commission 100 F Street, NE Washington, DC 20549 Re: Custody Rule and Trading Controls Relating to Bank Loans Dear Mr. Cellupica: The Loan Syndications and Trading Association (“LSTA”)1 appreciates the invitation from the Staff of the Securities and Exchange Commission (“the “Commission”) for industry engagement on Rule 206(4)-2 under the Investment Advisers Act of 1940 (the “Custody Rule”) as set forth in your letter of March 12, 2019 (“Letter”). As a threshold matter, the LSTA appreciates and supports the investor protection goals of the Custody Rule. However, recent guidance regarding the Custody Rule relating to instruments that do not settle on a delivery- versus-payment (“DVP”) basis2 has caused confusion, as LSTA’s members understood until relatively recently that investing in bank loans as authorized by clients would constitute “authorized trading” and thus would fall outside the definition of “custody” under the Rule.3 1 The LSTA is a not-for-profit trade association that is made up of a broad and diverse membership involved in the origination, syndication, and trade of commercial loans. The 350 members of the LSTA include commercial banks, investment banks, broker-dealers, hedge funds, mutual funds, insurance companies, fund managers, and other institutional lenders, as well as service providers and vendors. The LSTA undertakes a wide variety of activities to foster the development of policies and market practices designed to promote just and equitable marketplace principles and to encourage cooperation and coordination with firms facilitating transactions in loans.
    [Show full text]
  • Faqs What Is a Syndicated Loan?
    FAQs What is a syndicated loan? A syndicated loan facility may encompass a single loan facility or a variety of different facilities, making up a total facility commitment (the "Facility"). Most commonly, this will constitute a term loan and/or a revolving credit facility, but may also include a swingline facility, standby facility, letter of credit facility, guarantee facility or other similar arrangements. Whilst the underlying instruments may differ, however, the structure of a syndicated loan is always the same - in each case, it involves two or more institutions contracting to provide credit to a particular corporate or group. Under a syndicated loan, the borrower or borrowing group (the "Borrower") will typically appoint one or more entities as "mandated lead arranger(s)" (the "MLA"). The MLAs will then proceed to sell down parts of the loan to other lenders (the "Lenders") in the primary market, whilst often retaining a proportion of the loan itself/themselves. The arrangement is put together under one set of terms and conditions (the "Facility Documentation"), usually following LMA recommended form facility documentation, with each Lender's liability contractually limited to the amount of its participation. As a result, the syndicated loan market facilitates the sharing of credit risk, and it is therefore possible for a large number of Lenders to participate in facilities of various amounts, well in excess of the credit appetite of a single Lender. The syndicates themselves can range in size. Syndicates of only a small number of Lenders are often referred to as "club loans". Following final allocation of commitments in respect of the Facility to the Lenders, the Facility then becomes "free to trade", subject to the terms and conditions contained in the Facility Documentation.
    [Show full text]