The Effect of Secondary Loan Trading on Loan Syndidcation

, The University of 黑料传送门 Booth 

1) We will investigate the impact of secondary loan trading on the incentives of lead arrangers to invest in costly ex-ante screening of borrowers. We hypothesize that lenders with a higher propensity to make transaction-oriented loans invest less in the collection of private information about borrowers’ prospects than do lenders with a higher propensity to engage in relationship loans. Lower screening incentives will result in transaction lenders (TLs) generating less private information about borrowers relative to relationship lenders (RLs) that intend to hold the loan. This implies that TL-led loans will exhibit relatively less information asymmetry between lead arrangers and syndicate participants. We predict that as a result of lower information asymmetry(1) lead arrangers on TL-led loans will be required to retain a smaller percentage of loans than the leads on RL-led loans will; and (2) the probability that syndicate participants without previous relationships with the borrower and/or the lead arranger will join the syndicate will be relatively higher for TL-led vs. RL-l ed loans. Further, because TLs collect less private information about borrowers, TL-led loans potentially reflect greater information asymmetry between the borrower and the lending syndicate. We therefore predict that firms borrowing from TLs are likely to be relatively more transparent than those borrowing from RLs. We believe that our novel research design will contribute to the literature by providing direct evidence on the extent to which the option to sell loans in the secondary market results in lead banks gathering less private information about borrowers’ prospects.2) We will explore how the evolution of secondary market loan prices affects loan syndication dynamics in the primary loan market. Based on the limited secondary loan market data we currently have, we observe that loan prices significantly decline following a loan’s original sale on the secondary market. While the loans are sold for the first time on the secondary loan market roughly at par, by the end of the third year following the initial sale loans are traded at around91% of par value. We hypothesize that the substantial decline in loan pricing can be driven by both the decline in the quality of the lead arranger’s monitoring and the drop in secondary loan market liquidity. We are interested in examining how this secondary price reduction affects the dynamics of the primary loan market because the reduction in loan pricing may cause significant losses if lenders’ liquidity constraints force them to sell loans following loan origination. We predict that lenders will account for expected secondary loan market losses, potentially affecting2syndicate structure and composition, as well as loan terms in the primary market. We will also estimate how the effect of the secondary loan pricing on the primary loan market dynamics varies depending on the lead arranger’s reputation, the information transparency of the borrower and the tightness of the supply of credit in the economy. We are also interested in exploring how the crisis affected the evolution of secondary loan market prices. We expect loan prices to drop more significantly for loans issued by lead banks experiencing higher losses during the crisis years, reflecting on secondary market participants’ perception of these banks’ loan origination and monitoring quality. Our analyses of the evolution of secondary market prices and its effect on the primary loan market dynamics will enhance our understanding of secondary loan trading and the interdependence of the primary and secondary loan markets