What Drives the Arrangement Timetable of Bank Loan Syndication ?

Overview & Motivations Literature Loan syndication process Empirical design Methodology Data Results Summary

What Drives the Arrangement
Timetable of Bank Loan Syndication ?

Christophe J. Godlewski

LaRGE, EM Strasbourg Business School, University of Strasbourg

FMA 2008, Prague

Christophe J. Godlewski University of Strasbourg
What Drives the Arrangement Timetable of Bank Loan Syndication ? 1/ 25


Outline

1 Overview & Motivations
2 Literature
3 Loan syndication process
4 Empirical design
5 Methodology
6 Data
7 Results
8 Summary


Global syndicated lending market has reached 2.8 trillion USD
and 6,600 issues in 2006 (Thomson Financial, 2006)



Important source of external ﬁnance in emerging markets: e.g.
more than 50% of total corporate ﬁnancing in US



Syndicated loan = loan granted jointly and under common terms
by a group of banks to a borrower



Borrower mandates a lead bank (the arranger)



Loan terms negotiated by these two agents



Loan terms negotiated by these two agents
Arranger ﬁnds participant banks that grant a share of the loan
(compensation = spread + fees)



Motivations for borrowers: speed of deal arrangement, ability to
arrange cross border transactions, restriction of negotiation with one
bank (the arranger), uniform terms and conditions, more competitive
pricing resulting in lower spreads, lower fees compared to bond
issues, more ﬂexible funding structure, larger amount compared to
public ﬁnance, and bilateral relationships with participants



Motivations for borrowers: speed of deal arrangement, ability to
arrange cross border transactions, restriction of negotiation with one
bank (the arranger), uniform terms and conditions, more competitive
pricing resulting in lower spreads, lower fees compared to bond
issues, more flexible funding structure, larger amount compared to
public finance, and bilateral relationships with participants
Motivations for lenders: diversification of loan portfolios, avoiding
excessive single-name exposure (regulatory compliance) while
maintaining a relationship with the borrower, exploiting comparative
advantages of syndicate members in terms of financing and
eventually in terms of information sharing, diversification of income
sources (fees), tackling lack of origination capability and origination
costs



Potential agency problems



Informational frictions between senior (arranger(s)) and junior
(participants) members of the syndicate



Borrower monitoring by multiple creditors ⇒ cost ineﬃciency and
free-riding



free-riding
Delegation of the monitoring duty by the syndicate members to the
arranger = syndication agent



free-riding
Monitoring eﬀort unobservable ⇒ Moral hazard problem



free-riding
Arranger collects private information (previous relationship / due
diligence) ⇒ arranger = informed lender



free-riding
If information cannot be credibly communicated to the syndicate or
veriﬁed by it ⇒ Adverse selection problem ⇒ Syndication of loans
with the less favorable information



free-riding
If information cannot be credibly communicated to the syndicate or
veriﬁed by it ⇒ Adverse selection problem ⇒ Syndication of loans
with the less favorable information
Borrower’s ﬁnancial distress more complicated
⇒ lenders must reach a collective decision


Focus on the arrangement timetable of the loan syndication



Primary concern for the borrower ⇒ fast arrangement =
competitive advantage to fund investment opportunities



Primary concern for the arrangers ⇒ fast arrangement =
reputation signal



reputation signal
Loan syndication = complex process / speciﬁc agency and
recontracting risks / several actors (borrower, arranger(s),
participants)



reputation signal
participants)
Attractiveness of deal terms / syndicate structure / borrower risk
proﬁle + potential agency problems + banking environment ⇒
inﬂuence arrangement timetable



reputation signal
participants)
First research investigating factors driving bank loan
syndication arrangement timetable worldwide



Growing empirical literature: focus = pricing, syndication
decision, syndicate structure / design



Syndicate design: Lee and Mullineux (2004), Song (2004), Jones
et al. (2005), Bosch and Steﬀen (2006), Champagne and
Kryzanowski (2007), Fran¸ois and Missonier-Piera (2007), Suﬁ
c
(2007), Godlewski (2008) . . .



c
(2007), Godlewski (2008) . . .
Syndicated loan pricing: Nini (2004), Harjoto et al. (2006),
Ivashina (2006), Carey and Nini (2007), Focarelli et al. (2008) . . .



c
(2007), Godlewski (2008) . . .
Syndication decision: Dennis and Mullineaux (2000), Altunbas
et al. (2005), Godlewski and Weill (2008)



c
(2007), Godlewski (2008) . . .
Syndication decision: Dennis and Mullineaux (2000), Altunbas
et al. (2005), Godlewski and Weill (2008)
Few theoretical papers: Pichler and Wilhelm (2001), Schure et
al. (2005), Casamatta and Haritchabalet (2007), Tykvova (2007)
...



Sequential process ⇒ 3 main stages



1. Pre-mandated stage
Borrower solicits competitive oﬀers to arrange and manage
the syndication with one or more banks (usually main
relationship banks)



relationship banks)
From the proposals ⇒ borrower chooses one or more
arrangers to form a syndicate and negotiate a preliminary
loan agreement



relationship banks)
From the proposals ⇒ borrower chooses one or more
arrangers to form a syndicate and negotiate a preliminary
loan agreement
Arranger’s duties = negotiation of key loan terms with the
borrower, production of an information memorandum,
appointment of participants and structuring of the
syndicate



2. Post-mandated stage



Preparation of a information memorandum for potential
participants (produced collectively by the arranger and the
borrower / contains information about the borrower and
the deal)



the deal)
Set of targeted participants determined by the arranger



the deal)
Organization of a roadshow ⇒ presentation and discussion
of the information memorandum + announcement of
closing fees + establishment of a timetable for
commitments



the deal)
commitments
Formal invitations of targeted participants



the deal)
commitments
Formal invitations of targeted participants
Under-subscription vs Over-subscription



3. Completion date



3. Completion date
Deal becomes active



3. Completion date
Deal becomes active
Loan is operational



3. Completion date
Deal becomes active
Loan is operational
Debt contract is binding



Timetable measured in days from the launching date until the
completion day



completion day

Launching date Completion date
t0 t1

Pre−mandated stage Post−mandated stage Active deal

Figure: The sequence of events and stages of loan syndication arrangement.



completion day

t0 t1






completion day

t0 t1



Focus on loan and syndicate characteristics + banking
environment (country characteristics)


Tab. 1 Loan and syndicate variables
Variable Description Argument Expected
sign



sign
Loan size log of loan size (M USD) complexity / risk +
+ agency pbs



sign
+ agency pbs
Spread bps risk +



sign
+ agency pbs
Spread bps risk +
Up-front fee bps arranger incentives -



sign
+ agency pbs
Spread bps risk +
Maturity in months risk +/-



sign
+ agency pbs
Spread bps risk +
Number of - agency pbs -
arrangers + p. success
+ spec. agents



sign
+ agency pbs
Spread bps risk +
Number of - agency pbs -
arrangers + p. success
+ spec. agents
S&P Rating = 1 if a Standard & Poor’s transparency -
senior debt rating exists - agency pbs



sign



sign
Guarantors = 1 if there is at least - agency pbs +/-
one guarantor “observed risk”



sign
Sponsors = 1 if there is at least - agency pbs -
one sponsor



sign
one sponsor
Covenants = 1 if the loan agreement - agency pbs +/-
includes covenants “observed risk”



sign
one sponsor
Senior debt = 1 if the debt is senior - agency pbs +/-
“observed risk”



sign
one sponsor
Senior debt = 1 if the debt is senior - agency pbs +/-
“observed risk”

+ Control variables : loan type (Term loan), loan purpose (Corporate, Debt
repayment, Project ﬁnance, Working capital), benchmark rate (Libor, Euribor)
year, geographical area and industry dummies



Focus on information disclosure and legal risk borrower country
characteristics (following Esty and Megginson, 2003; Qian and Strahan,
2007)



2007)

Tab. 3 Banking environment variables
sign



2007)

sign
Public Credit =1 if a public credit registry - agency pbs -
Registries operates in the country



2007)

sign
Risk Management =1 if regulation requires pub. - agency pbs -
Disclosure disclosure of risk mgt tech.



2007)

sign
NPL Deﬁnition =1 if a formal deﬁnition - agency pbs -
of NPL exists



2007)

sign
of NPL exists
Creditor Rights Index (0 weak - 4 strong) recontracting risk +/-
of creditor rights - agency pbs



2007)

sign
of NPL exists
Rule of Law Index (0 weak - 10 strong) recontracting risk +/-
of law enforcement - agency pbs



2007)

sign
of NPL exists
Rule of Law Index (0 weak - 10 strong) recontracting risk +/-
of law enforcement - agency pbs

+ Control variable : borrower country legal origin (English law)


Dependent variable = timetable of a syndicated loan arrangement ⇒
survival analysis



survival analysis
T = arrangement timetable of a loan syndication process



survival analysis
Survival probability S(t) = probability that the syndication process
lasts from the time origin (launching date) to a future time t:

S(t) = Prob(T ≥ t) = 1 − F (t), (1)
where F (t) is the cumulative distribution function for T .



survival analysis

S(t) = Prob(T ≥ t) = 1 − F (t), (1)
Hazard h(t) = rate of transition of the syndication arrangement
timetable to completion, given it has not been completed before ⇔
instantaneous event rate for the syndication process which has
already lasted to time t



survival analysis

S(t) = Prob(T ≥ t) = 1 − F (t), (1)
Hazard h(t) = rate of transition of the syndication arrangement
timetable to completion, given it has not been completed before ⇔
instantaneous event rate for the syndication process which has
already lasted to time t

Prob(t ≤ T < t + ∆t|T ≥ t) f (t)
h(t) = lim∆t→0 = , (2)
∆t S(t)
where f (t) is the probability density function of T


Parametric survival models ⇒ accelerated failure time (AFT) models
(proportionality of hazards is strongly rejected in our case)



Eﬀect of a predictor is to alter the rate at which the syndication
proceeds along time axis (i.e. to accelerate the time to event)



Natural logarithm of the survival time ln(t) is expressed as a linear
function of the covariates X :

ln(t) = a + X ′ β + ǫ, (3)
where a is the intercept and ǫ is the error term with density f (t)
(distributional form of the error term determines the regression
model)



Natural logarithm of the survival time ln(t) is expressed as a linear
function of the covariates X :

ln(t) = a + X ′ β + ǫ, (3)
where a is the intercept and ǫ is the error term with density f (t)
(distributional form of the error term determines the regression
model)
Hazard function:

h(t) = h0 exp(a + X ′ β)(1 + exp(a + X ′ β)t), (4)
where h0 is the baseline hazard rate


Loan and syndicate characteristics ⇒ Dealscan (LPC, Reuters)



Banking environment ⇒ La Porta et al. (1988), Barth et al.
(2005), Djankov et al. (2007)



(2005), Djankov et al. (2007)
Sample size determined by information availability on relevant
variables



(2005), Djankov et al. (2007)
variables
Only completed deals (no censoring) + outliers elimination (99-th
centile = 234 days !)



(2005), Djankov et al. (2007)
variables
Only completed deals (no censoring) + outliers elimination (99-th
centile = 234 days !)
Final sample = 4,807 syndicated loans from 68 countries between
1992 and 2006



.02
.015
Density
.01
.005
0

0 50 100 150 200 250
duration

Figure: Frequency distribution of arrangement timetable of loan syndication.



.02
.015
Density
.01
.005
0

0 50 100 150 200 250
duration


Mean timetable = 55.14 days (∼ 8 weeks) / standard deviation = 37.02
days



.02
.015
Density
.01
.005
0

0 50 100 150 200 250
duration


Mean timetable = 55.14 days (∼ 8 weeks) / standard deviation = 37.02
days
Descriptive statistics ⇒ table 1 in paper’s appendix



Kaplan−Meier survival estimate Smoothed hazard estimate Nelson−Aalen cumulative hazard estimate
1.00

.06

8.00
0.75

6.00
.04
0.50

4.00
.02
0.25

2.00
0.00

0.00
0
0 50 100 150 200 250 0 50 100 150 200 250 0 50 100 150 200 250
analysis time analysis time analysis time

(a) Survival function (b) Hazard function (c) Cumulative hazard
function

Figure: Plots of empirical distributions.



1.00

.06

8.00
0.75

6.00
.04
0.50

4.00
.02
0.25

2.00
0.00

0.00
0
0 50 100 150 200 250 0 50 100 150 200 250 0 50 100 150 200 250

function


Hazard function is not constant over time and exhibits two maximums (∼
50 days / 225 days)



1.00

.06

8.00
0.75

6.00
.04
0.50

4.00
.02
0.25

2.00
0.00

0.00
0
0 50 100 150 200 250 0 50 100 150 200 250 0 50 100 150 200 250

function


Hazard function is not constant over time and exhibits two maximums (∼
50 days / 225 days)
A syndication process lasting 50 days has a probability of completing the
next day of 30% while a syndication process lasting more than 200 days
has a probability of completing above 60%



AFT model with generalized gamma distribution (lowest log likelihood, Akayke
and Schwarz criterions / other distributions lead to similar results)




Tab. 4 Results - Baseline model (spec. 1)
Control variables included but not reported
Variable Coef.
Intercept -29.8176
Loan size 0.0404
Spread 0.0012
Maturity 0.0026
N. arrangers -0.0172
Guarantors -0.0782
S&P Rating 0.0090




Tab. 4 Results - Baseline model (spec. 1)
Control variables included but not reported
Variable Coef.
Intercept -29.8176
Loan size 0.0404
Spread 0.0012
Maturity 0.0026
N. arrangers -0.0172
Guarantors -0.0782
S&P Rating 0.0090
scale 1.7382
N 4,781
Log L -4,703.61
LR 629.91
AIC 9,453.21
BIC 9,602.08



Tab. 5 Results - Augmented baseline model (spec. 2)
Variable Coef.



Variable Coef.
Intercept -71.2721
Loan size 0.0429
Spread 0.0012
Up Front Fee -0.0006
Maturity 0.0016
N. Arrangers -0.01535
Guarantors -0.0422
Sponsors -0.0324
Covenants 0.0164
Senior Debt -0.2258
S&P Rating -0.0055



Variable Coef.
Intercept -71.2721
Loan size 0.0429
Spread 0.0012
Up Front Fee -0.0006
Maturity 0.0016
N. Arrangers -0.01535
Guarantors -0.0422
Sponsors -0.0324
Covenants 0.0164
Senior Debt -0.2258
S&P Rating -0.0055
scale 0.5927
N 4,781
Log L -4,525.67
LR 726.78
AIC 9,123.34
BIC 9,356.34


Tab. 6 Results - Information disclosure and legal risk (1)
Loan and syndicate characteristics variables signiﬁcant and robust.
Variable spec. 3 spec. 4 spec. 5



Pub. credit reg. -0.0951



Pub. risk disc. -0.1074
NPL deﬁnition 0.2140



Pub. risk disc. -0.1074
NPL deﬁnition 0.2140
Creditor rights -0.0777
Rule of law 0.0754


What Drives the Arrangement Timetable of Bank Loan Syndication ?

What Drives the Arrangement Timetable of Bank Loan Syndication ?

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