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Bank Loans Non-Linear Structure of Pricing: Empirical Evidence from Sovereign Debts

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Author Info
Issam Hallak () (Center for Financial Studies)

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Abstract

The paper suggests an innovative contribution to the investigation of banking liabilities pricing contracted by sovereign agents. To address fundamental issues of banking, the study focuses on the determinants of the up-front fees (the up-front fee is a charge paid out at the signature of the loan arrangement). The investigation is based on a uniquely extensive sample of bank loans contracted or guaranteed by 58 less-developed countries sovereigns in the period from 1983 to 1997. The well detailed reports allow for the calculation of the equivalent yearly margin on the utilization period for all individual loan. The main findings suggest a significant impact of the renegotiation and agency costs on front-end borrowing payments. Unlike the sole interest spread, the all-in interest margin better takes account of these costs. The model estimates however suggest the non-linear pricing is hardly associated with an exogenous split-up intended by the borrower and his banker to cover up information. Instead the up-front payment is a liquidity transfer as described by Gorton and Kahn (2000) to compensate for renegotiation and monitoring costs. The second interesting result is that banks demand payment for all types of sovereign risk in an identical manner public debt holders do. The difference is that, unlike bond holders, bankers have the possibility to charge an up-front fee to compensate for renegotiation costs. Hence, beyond the information related issues, the higher complexity of the pricing design makes bank loan optimal for lenders on sovereign capital markets, especially relative to public debt, thus motivating for their presence. The paper contributes to the expanding literature on loan syndication and banking related issues. The study also has relevance for the investigation of the developing countries debt pricing.

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Paper provided by Center for Financial Studies in its series CFS Working Paper Series with number 2003/33.

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Length: 45 pages
Date of creation: 02 Feb 2003
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Handle: RePEc:cfs:cfswop:wp200333

Note: For helpful discussions and/or comments, I am especially indebted to Anindya Banerjee, James Dow, Ralf Elsas, Alexander Gümbel, Jan Pieter Krahnen, Tim Jenkinson, Colin Mayer, Hyun Song Shin, Oren Sussman, participants at seminars at CEMFI, Center for Financial Studies, European University Institute, London Business School, London School of Economics, Oxford Said Business School, the German Finance Association, Cologne 2002, International Finance and Economics Society, Heraklion 2002, and the Portuguese Finance Network, Èvora 2002. Finally I am grateful for the financial support from the European Commission Research and Training Network Understanding Financial Architecture: Political and Legal Frameworks and Economic Efficiency. All errors are my own responsibility.
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Related research
Keywords: Private debt; Sovereign debt; Syndicated loans; Up-front fees; Non-linear pricing design;

Find related papers by JEL classification:
F34 - International Economics - - International Finance - - - International Lending and Debt Problems
G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Mortgages

This paper has been announced in the following NEP Reports:

References listed on IDEAS
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  16. Shockley, Richard L & Thakor, Anjan V, 1997. "Bank Loan Commitment Contracts: Data, Theory, and Tests," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 517-34, November.
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  22. Gorton, Gary & Kahn, James, 2000. "The Design of Bank Loan Contracts," Review of Financial Studies, Oxford University Press for Society for Financial Studies, vol. 13(2), pages 331-64.
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Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Issam Hallak, 2004. "Why Borrowers Pay Premiums to Larger Lenders: Empirical Evidence from Sovereign Syndicated Loans," CSEF Working Papers 124, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy. [Downloadable!]
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