The U.S. Syndicated Term Loan Market: Who Holds What and When?

Abstract

This note looks carefully at the transition of ownership of syndicated term loans immediately after a deal is launched based on the Shared National Credit data.

The Myth of the Lead Arranger’s Share

“…3 Lee et al (2019) find, independently of us, that, for leveraged term loans, the lead agent reduces its share on the days other loans in 49% of cases in which it sold its entire stake. 4 We examine the implications of these findings for any potential asymmetric information problems arising between the lead arranger and investors in the syndicated loan market.…”

The Dollar and Corporate Borrowing Costs

“…Bord and Santos (2012). Irani et al (2018), and Lee et al (2019) document that nonbank participants now account for 80 percent of leveraged loan holdings and that nonbanks hold the most risky loans in this segment. Since collateralized loan obligations (CLOs) and mutual funds cannot participate in the primary market they often pre-arrange buying loan shares from participating banks, who originate to distribute these shares.…”

“…However, if the spread needs to be flexed up during the syndication process to place the loan, the borrowers gets partially compensated for this extra interest rate cost by a reduction in the arranging fee. The average per-loan fee income, about 2-3 percent of the loan amount, generated over the relatively short syndication process dwarfs any potential additional interest income on the retained loan share, on average 5 percent for term loans (Lee et al, 2019). In other words, the final fee (payoff) of the arranger is, to first order, a function of loan term adjustments and final loan terms that the borrower receives.…”

How central bank swap lines affect the leveraged loan market

“…CIP deviations reflect the difference between the cost of borrowing U.S. dollars in the cash market directly and the cost of borrowing U.S. dollars indirectly by first borrowing in foreign currency and then swapping the foreign currency into U.S. dollars today and back into foreign currency in the future through the FX swap market.2 Details online, https://www.federalreserve.gov/monetarypolicy/fima-repo-facility.htm.3 The figure updates the analogous figure inLee et al (2019) Irani et al (2020). document the increasing importance of nonbank lenders in this market over the past 20 years.4 CIP deviations open up arbitrage opportunities that market participants, in particular banks, should take advantage of and arbitrage away.…”

“…Notes:The figure shows the average five-year U.S. dollar Libor cross-currency basis against nine major currencies (a measure of covered interest rate parity[CIP] deviations between the U.S. dollar and foreign currencies) over time at a monthly frequency. It also depicts the mutual fund (MF) and collateralized loan obligations (CLO) share in new leveraged loans based on information from the Shared National Credit Reports and ends in 2018, based on the classification inLee et al (2019). The correlation coefficient between the average cross-currency basis and the MF and CLO share in leveraged loans is -0.47. sources: Bloomberg, Shared National Credit (SNC)…”