Non-bank Loan Investors and Borrowers’ Renegotiation
Bank of Canada
E-mail: [email protected]
João A. C. Santos∗
Federal Reserve Bank of New York
Nova School of Business and Economics
E-mail: [email protected]
September 2, 2015
JEL classification: G21, G23
Keywords: Corporate loans, renegotiation, loan syndicates, investor diversity, lead banks.
∗The authors thank Jason Allen, Berlin Mitchell, Enrique Schroth (discussant), Larry Wall and seminar
participants at the EuroFIT Research Workshop on Corporate Loans, the University of Amsterdam, Federal
Reserve Bank of Atlanta for valuable comments. We thank Vitaly Bord for outstanding research assistance.
The views stated herein are those of the authors and are not necessarily the views of the Bank of Canada, the
Federal Reserve Bank of New York or the Federal Reserve System.
Non-bank Loan Investors and Borrowers’ Renegotiation Prospects
We document that the growth of non-bank lenders in the syndicated loan market has a sig-
nificant effect on loan renegotiations. Loans financed relatively more by non-bank lenders
are associated with lower likelihood of renegotiation, while strong lead bank presence fa-
cilitates renegotiations. Diversity among non-bank investors, either in terms of number of
investor types or investment shares, affects adversely the renegotiation prospects. We ad-
dress the potential endogeneity between renegotiation prospects and syndicate structures
by using instrumental variable approach and alternatively by isolating a set of relatively
unexpected renegotiations which are unlikely to trigger endogenous adjustments to syn-
dicate structures prior to renegotiations. Our findings highlight previously unrecognized
role of the growing presence of non-bank lenders in the corporate lending business that is
negative treatment to renegotiations.
Modern banking theories posit that bank loans are unique as banks have a comparative ad-
vantage in monitoring borrowers (e.g., Ramakrishnam and Thakor (1984)), which includes
screening loan applicants to identify their creditworthiness, as well as supervising and prevent-
ing borrowers from undertaking opportunistic behavior during the realization of the project.
Consistent with these theories, the corporate lending business was historically dominated by bi-
lateral agreements between banks and borrowers whereby banks kept the loans they originated
on their balance sheets.
With the development of the syndicated loan market, banks began to retain only a
portion of the loans they originated, placing the remainder with other institutional investors.1
Early on banks were the dominant investors in loan syndicates, but with the deepening of the
secondary loan market many other investors, including pension funds, hedge funds, mutual
funds, private equity firms and collateral managers, began to invest in corporate loans.2 In
1988, there were on average 1.3 non-bank investor categories in corporate loan syndicates in
the U.S. while that number had gone up to 3 up to 2010. Over the same period, not only the
diversity of investors in loan syndicates went up, but so did their market share (Figure 1).3
The growing presence of non-bank investors in loan syndicates has likely given banks
an opportunity to extend new loans and to likely do so under more favorable terms. The
increasing presence of non-bank investors in loan syndicates, however, may adversely affect a
distinct feature of traditional bank loans—the flexibility to renegotiate their loan terms. In
general, it will be easier for a borrower to renegotiate the loan terms with a single lender
than with a syndicate of diverse lenders. The presence of multiple lenders will give rise to
coordination problems, which will likely grow with the heterogeneity of investors. The reason
1 The U.S. syndicated loan market rose from a mere $339 billion in 1988 to $2.2 trillion in 2007, the year
the market reached its peak.
2 The secondary loan market evolved from a market in which banks participated occasionally, most often by
selling loans to other banks, to an active, dealer-driven market where loans are sold and traded much like other
debt securities. The volume of loan trading increased from $8 billion in 1991 to $176 billion in 2005.
3 See Bord and Santos (2012) for analysis of the roles of different investors in the U.S. syndicated loan market
over the last two decades.
is that an increase in investor diversity will imply a rise in the number of different business
models and objective functions (Botlon and Sharfstein (1996), Gison et al. (1990)).4 Investors’
diversity will also make divergence of opinion about the benefit of renegotiation to rise by virtue
of differences in the information available to different investors. Lastly, if lead banks rely on
the growing presence of non-bank investors in the syndicate to lower their retained portion in
the loan, they may indirectly decrease borrowers’ prospects to renegotiate (e.g., Agarwal et al.
(2011), Adelino et al. (2013)). The share of the lead bank is important not only because it
affects the lead’s screening and monitoring incentives, but also because it affects its influence
over the syndicate participants in negotiation process.5
In this paper, we investigate the importance of investors’ diversity in syndicated loans
for borrowers’ prospects to renegotiate their credits. The U.S. syndicated loan market pro-
vides a unique opportunity to answer this question both because investors’ diversity has been
growing and because we now have detailed information on the composition of loan syndicates
throughout the life of the loan. We consider renegotiations that occur outside financial distress
or default and focus on renegotiations that increase the size of the credit. While focusing on
the role of investor diversity, we also account for other factors that may affect the outcome
of a renegotiation, including loan characteristics, the financial condition of the borrower and
the lead bank. Lastly, we capitalize on the panel structure of the data to isolate unexpected
renegotiations from expected ones to address concerns about the endogeneity of syndicate and
renegotiations. In addition, we also reply on an instrumental variable approach to estimate the
(unbiased) effect of lead bank and syndicate structure in renegotiations. Our instrumental vari-
able is the first-time arrival of bank participant lenders in the syndicate, which is arguably not
driven by the likelihood of renegotiation, and it affects the syndicate structure substantially.
We rely on the Shared National Credit database, which contains detailed information
on syndicated loans in the U.S. since the late 1980s. Critical for our purposes is the fact that
4For instance, investment funds or private equity firms may not have funding to accommodate a request by a
borrower to increase the initial loan amount. Similarly, since CLOs have a limited life, they may not be willing
to renegotiate the loan maturity that would go beyond their period of existence.
5 See Gorton and Pennacchi (1995) for models that capture the impact of lead bank share on monitoring
incentives, and Sufi (2007), Ivashina (2009) for studies that argue that lead banks use their loan share to align
their incentives with those of syndicate participants and commit to future monitoring.
the SNC database contains information about each investor in a given loan including their
exact loan share. In addition, our analysis benefits from information about credit line draw
downs, which allows us to define unexpected renegotiations to increase the credit size. In our
definition, unexpected renegotiations are preceded by a relatively large undrawn amount and
followed by a large withdrawal at the time of the renegotiation.
We find that the lead bank share plays an important role in the renegotiation outcome.
A change in the lead share from the 25th to the 75th percentile leads to an increase in rene-
gotiation probability from 13% to 24%. Compared to the unconditional renegotiation rate of
15.6%, this result suggests that lead banks’ retained shares have a relatively large impact on
the likelihood of renegotiations. In line with this finding, our results show that loans in which
the lead bank has divested its entire share are significantly less likely to be renegotiated.
We find that an increase in non-bank loan shares in a syndicate reduces the likelihood
of renegotiation. Consistent with this finding, loans with higher number of non-bank investors
are less likely to be renegotiated. Similar conclusion holds when we consider measures of
diversity that account for the ownership shares held by each type of non-bank investors as
well as measures that consider the concentration in the ownership structures among non-bank
Our findings are both novel and important because the growing presence of non-bank
investors in loan syndicates seems to weaken the option to renegotiate that is unique to bank
loans. It is well understood that borrowers value the possibility to renegotiate, even outside of