DP16452 Ownership Concentration and Performance of Deteriorating Syndicated Loans
|Author(s):||Mariassunta Giannetti, Ralf Meisenzahl|
|Publication Date:||August 2021|
|Date Revised:||August 2021|
|Keyword(s):||Credit Quality, Debtor Concentration, Leveraged Lending|
|Programme Areas:||Financial Economics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=16452|
Regulation and capital constraints may force banks and collateralized loan obligations (CLOs) to sell deteriorating loans, potentially hampering renegotiation and amplifying the initial negative shock to the borrower. We show that banks and CLOs sell downgraded loans to mutual funds and hedge funds. The reallocation of loan shares favors the syndicate's concentration increasing lenders' incentives to renegotiate. However, syndicates remain less concentrated when potential buyers experience financial constraints and subsequently loans are less likely to be amended and more likely to be downgraded even further. Our findings indicate that existing regulations may amplify shocks to credit quality during periods of generalized distress in the financial system.