Syndicated loan spreads and composition of syndicates: Evidence from Eurozone countries

Abstract

OBJECTIVE: This paper studies the effect of non-bank institutional investors' participation in syndicated loans on loan spreads in Eurozone countries. The first paper on this subject is published by Lim et al (2014) on Journal of Financial Economics. Lim's paper studies loan spreads and loan composition using evidence from US. This paper is a comparison study with data from Eurozone countries. Europe is of particular interest for two reasons. First, sheer growth of syndicated loan market has increased by 32% in 2013 (Bloomberg), making Europe the largest growing market on a global basis. Second, Europe is different in terms of regulatory frameworks and cultures, which directly affects cross-border lending behaviors. It is interesting to see potential differences between the two capital markets.

DATA AND METHODOLOGY: Final sample contains 8089 facilities issued between 1998 and 2007 from 13 Eurozone countries. Leveraged loans are extracted because a majority of non-bank institutional participation happens in leveraged loan market. Primary data is extracted from Thomson One, including both firm-level and facility-level variables. In addition, SDC Platinum is used to obtain borrowers' bond issuances during the period from 1990 to 2007. The reason to start from 1990 is to include potential bond issuances made several years prior to loan issuances in 1998 or later. I use public available information, such as Financial Times, financial statements, Orbis, Bloomberg Market data, and Internet resources to further complete firm-level variables. I use OLS regressions to estimate all-in-drawn spreads associated with non-bank institutional investors across facility types, controlling for issuer-, facility-, and lender-level characteristics. Final regression sample contains 1148 facilities with all-level variables available.

EMPIRICAL FINDINGS: Main findings show that non-bank premiums exist in Eurozone countries, e.g. non-bank facilities are in general 51.49 bps higher than bank-only facilities, when tested for all facilities. The same finding holds true when tested for within-loan estimates for facilities issued in the same loan package. Furthermore, I find premiums are even larger when compared to US market for all term loan facilities (69.61 - 68.90 bps) and term loan B facilities (81.32 - 74.49 bps). When included bond issuance as proxy to financial constraints, results suggest that issuers which don't have access to bond market, i.e. financially more constraint, tend to issue loans with higher spreads to attract non-bank institutional investors. When all-in-drawn spreads are estimated based on institutional investors' types, results show finance companies is the group associated with the largest non-bank premiums (45.45) before adjustment of lender categorization. After ad- justing for non-bank institutional investor category, hedge funds and private equity funds are in- deed associated with the largest premiums (42.15).