Information asymmetry effect on tranching of syndicated loans in emerging markets

Abstract

PURPOSE OF THE STUDY:

This study focuses on tranching of syndicated loans in emerging markets. Tranching means dividing a loan into heterogeneous parts between the lenders. I study whether tranching affects loan pricing by estimating the effect of tranching on loan spreads and upfront fees, separately. I further test if borrowers benefit from tranching loans by obtaining loans for lower price. I also study the syndicate structure and analyze what types of lenders lead and participate in different loan tranches. Both, the lender type (bank vs. non-bank) and nationality (domestic vs. foreign), are considered. Information asymmetries are also a focal point throughout my study as information asymmetries are considerably high in emerging economies.

DATA AND METHODS:

The data consist of 4946 loan observations between 2000 and 2014 from 12 emerging economies: Argentina, Brazil, Chile, China, India, Indonesia, Malaysia, Mexico, Poland, Philippines, Russia, and Turkey. Three databases are used in this study: SDC Platinum for information about the syndicated loans, Thomson Reuters One Banker for specific information about borrowing firms, and BankScope for information on lending institutions. OLS and logit regressions and a two stage model are used for studying loan pricing and logit regressions are used for determining the syndicate composition.

RESULTS:

Tranched loans are found to be issued by riskier borrowers. However, against previous research, tranching does not increase the spreads charged. On the other hand, the upfront fees are higher for tranched than for non-tranched loans. Further, transparent borrowers are able to obtain loans for lower spreads by taking tranched loans and hence benefit from tranching. Regarding the syndicate structure, non-banks are more likely to be involved in the syndicate as a lead arranger and a participant if the loan is tranched. When it comes to lender nationality, domestic lenders are more likely to take part in tranched loans than foreign lenders. Domestic lenders also fund riskier loans, especially domestic non-banks are involved in loans made to riskier borrowers.