Lender Behaviour and the Structure and Pricing of Syndicated Loans

In 2004, international syndicated lending represented more than one-third of new international capital market financing, and is deemed to have generated more underwriting revenue in recent years than either the equity or the bond market (Madan, Sobhani and Horowitz, 1999). In particular, leveraged lending has been growing rapidly, as commercial borrowers have increasingly displayed a preference for leveraged borrowing over junk-bond financing (Jones, Lang and Nigro, 2000).1 Specific tranches of such syndicated loans are purchased by non-bank investors. These non-bank tranches are in most cases equivalent to public bonds and subject to an ‘arm’s-length’ relationship in the case of problems (Altman and Suggitt, 2000). This means that banks arranging syndicated credits, especially at the leveraged end of the credit quality spectrum, have de facto been acting as investment banks, collecting fees for putting together syndicates, but not always warehousing the loans themselves, leaving that activity to commercial banks or even non-banks.2 Indeed, in the aftermath of the banks’ reduced lending following the Russian crisis, BIS locational banking statistics show a marked decline after 1995 of banks’ international loan portfolios relative to their total foreign claims including holdings of securities (Figure 5.1).