DP11956 Pipeline Risk in Leveraged Loan Syndication

Author(s): Max Bruche, Frédéric Malherbe, Ralf Meisenzahl
Publication Date: April 2017
Keyword(s): Debt overhang, lead arranger share, leveraged loans, pipeline risk, syndicated loans
JEL(s): G23, G24, G30
Programme Areas: Financial Economics, Monetary Economics and Fluctuations
Link to this Page: www.cepr.org/active/publications/discussion_papers/dp.php?dpno=11956

Leveraged term loans are typically arranged by banks but distributed to institutional investors. Using novel data, we find that to elicit investors' willingness to pay, arrangers expose themselves to pipeline risk : They have to retain larger shares when investors are willing to pay less than expected. We argue that the retention of such problematic loans creates a debt overhang problem. Consistent with this, we fi nd that the materialization of pipeline risk for an arranger reduces its subsequent arranging and lending activity. Aggregate time series exhibit a similar pattern, which suggests that the informational friction we identify could amplify the credit cycle.