Syndicated bank loans and capital structure
Purpose – The purpose of this study is to examine the impact of interest rates on the size and the maturity choice of a syndicated bank loan. In addition, it attempts to determine the long-run impact of a syndicated loan on the borrower's capital structure. Design/methodology/approach – The paper uses a sample of 6,903 syndicated bank loans in the USA, covering the period 1984-2004. First, all syndicated loans are categorized into two groups: loans in periods of increasing interest rates, and loans in periods of decreasing rates. Then, non-parametric tests are performed to compare the characteristics of the two groups, including the proceeds from the loans, and robust regressions are used to examine the impact of the interest rates on the maturity choice. Finally, robust regressions are employed to examine the long-run impact of the interest rates on the borrowers' leverage ratios. Findings – On the whole, the results reject the market timing theory of capital structure for syndicated bank loans. Firms in the two groups borrow in similar amounts, and in the long run, the difference between the two groups' leverage ratios is statistically insignificant. On the other hand, firms tend to choose longer maturities when the interest rates are low compared to the rates two or three years ago. Originality/value – To the best of the author's knowledge, this is the first study that links debt market conditions to the leverage ratios of firms that borrow in the syndicated bank loan market. In other words, this is the first study that tests the market timing theory of capital structure for syndicated bank loans. Design/methodology/approach – The approach taken is both theoretical and empirical. Findings – The authors show how the valuation process should be modified for firms that are expected to rebalance their debt and demonstrate the distortion in value that results if the traditional DCF valuation procedure is used instead. Furthermore, they illustrate the significance of their results using a sample of the largest largest leveraged buyouts of the current decade. Originality/value – To the authors' knowledge, this is the first investigation into this issue.
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Volume (Year): 37 (2011)
Issue (Month): 8 (August)
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