Pipeline Risk in Leveraged Loan Syndication

Finance

Further details

Co - written with Frederic Malherbe and Ralf R. Meisenzahl

ABSTRACT

We study the syndication of leveraged term loans and the associated risks that arrangers face. We establish that to place the loans with institutional investors on the best possible terms, arrangers must elicit their willingness to pay. Incentive compatibility implies that arrangers must retain larger shares of the loans that investors find less attractive. The retention of problematic loans is likely to result in a form of debt overhang and to impair arrangers' subsequent ability to arrange and extend credit. Using novel data, we provide empirical support for these hypotheses.