A Comparison of Syndicated Loan Pricing at Investment and Commercial Banks

Abstract

We reject the hypothesis that investment and commercial banks have identical loan-pricing policies. We find that compared to commercial banks, investment banks lend to less profitable, more lever aged firms, price riskier classes of term loans more generously, and offer relatively longer-term credits, usually with term, not commitment contracts. Investment banks typically establish higher credit spreads, although the premium declines when a commercial bank joins as syndicate co-arranger. Investment banks also price riskier classes of term loans more generously to borrowers than do commercial banks. Commercial-bank funding advantages do not appear to be a source of the pricing differences. Copyright (c) 2006 Financial Management Association International.

Liquidity in the pricing of syndicated loans

“…See, for example, Angbazo, Mei, andSaunders (1998), Casolaro, Focarelli, andPozzolo (2003), Chen (2005), Coleman, Esho, and Sharpe (2004), Dennis, Nandy, and Sharpe (2000), Harjoto, Mullineaux, and Yi (2006), Hubbard, Kuttner, and Palia (2002), Ivashina (2005), Moerman (2005), Santos and Winton (2005), Strahan (1999), and others. 12 The lenders and the borrower have different motivations for making the loan liquid.…”

“…We also use the firm size and the loan size as proxies for credit risk. Several prior studies (Bharath, Dahiya, Saunders, and Srinivasan, 2007;Harjoto, Mullineaux, and Yi, 2006, among others) have…”

Constraints on Loan Sales and the Price of Liquidity

“…The control variables in our specification are reasonably similar to those found in other studies of loan spreads, such as Chava et al (2007) and Harjoto et al (2006), each of which employs a larger sample than our own. The fact that the estimation results in those studies are broadly similar to our own provides some confidence that our results do not suffer from the problem of sample selection bias.…”

Syndicated Loans, Foreign Banking and Capital Market Development

“…The lead arranger drafts the loan terms, monitors compliance and typically holds the largest share of the loan. Of course, the fact that the loan is syndicated and that only a part of it is likely to remain on the balance sheet of the arranger creates pricing incentives that might be different than in other debt markets (Harjoto, Mullineaux, and Yi 2006). However, our interest is not the comparison of syndicated loans to other sources of financing but in the activities of foreign arrangers in the syndicated loan market and differences in market activity across countries.…”

“…Earlier work has focused on the structure of the financial industry without information about the borrowing firm or characteristics of the national markets. For example, Harjoto, Mullineaux, and Yi (2006) examine the differences in loan pricing by investment banks and commercial banks and, similarly, Steffen (2008) analyzes the effect on loan pricing of an ongoing banking relationship between the lead arranger and the borrower. Earlier, Carey, Post, and Sharpe (1998) used syndicated loan data to examine differences in the lending behavior of banks and private finance companies.…”