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 find 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.