BANKING RELATIONSHIPS IN
LOAN MARKETS
Discussion by
Gregory F. Udell
discussion of
“Competition or Collaboration?
The Reciprocity Effect in Loan Syndication”
Jian Cai
“Price Discovery and Dissemination of Private Information
By Loan Syndicate Participants”
Robert M. Bushman, Abbie J. Smith, and Regina Wittenberg-Moerman
“The Cost of Being Private: Evidence from Loan Markets”
Anthony Saunders and Sascha Steffen
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THE COMMON THREAD:
THE LOAN SYNDICATION MARKET
Key research questions on syndication:
• How does this market work?
• Where does this market fit into the
financial landscape?
• How does it solve the inherent moral
hazard problem in syndication?
• How is information disseminated among
and through participants?
• What are the determinants of loan pricing
in this market?
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KEY CONTRIBUTIONS
• Cai paper
– Addresses one of these key questions:
• The lead arranger moral hazard problem
– Prior literature showed that reputation and
loan retention were the key tools
– This paper finds evidence of an important third
tool
• Syndication reciprocity
– Consistent with anecdotal evidence on the
syndication “club” effect
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KEY CONTRIBUTIONS (cont.)
• Bushman, Smith and Wittenberg-Moerman
– Explores another key question: information
dissemination
– Presence of institutional investors accelerates
price discovery in the equity markets
– Indicates exploitation of private access to
information
– Adds another problem/challenge to the
syndication issue
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KEY CONTRIBUTIONS (cont.)
• Saunders and Steffen
– Using data from loan syndication market to
address a key corporate finance issue:
• Costs and benefits associated with the public vs.
private choice
• Finds that private companies pay more for debt than
public companies
– Methodology includes extensive controls and
matching technology
– Authors suggest that debt cost differences
related to informational opacity
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WHY DO WE CARE ABOUT THIS
MARKET?
• Loan syndication market is major source of
finance of mid-sized and large firms
• The loan syndication market is huge
– Rapid growth in volume:
1992: $240 billion
2006: $1,700 billion
– Precise data on stock of synd. loans not available –
can be proxied by Shared Nat’l Credit Program (> $20
mill, shared by 3 or more fed insured banks)
Total Commitments (2008): $2,789 billion
Outstandings (2008): $1,208 billion
Owned by US Banks (est.): $500 billion
Total US Bank C&I Outsdandings (2008): $1,418 billion
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THE COMMON DATA SOURCE:
DEALSCAN LPC DATABASE
• Extensive information about new loan
originations in the global commercial loan
market since 1988
• Many loans are syndicated – about 2/3
• Spans wide swath of borrowers from small
midsize companies to very large companies
– These companies are quite different in terms of
opacity and access to external markets
• LPC spawned a whole generation of research
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THE CONTEXT:
MANY DIFFERENT EXTERNAL MARKETS
• Commercial loan market
–Short term loans
–Intermediate term loan
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Mezzanine debt market
Medium term note market
Private placement market
Commercial paper market
Corporate bond market
Private equity market
Public equity market
NOT ALL LPC FIRMS HAVE ACCESS TO ALL MARKETS
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FIRM CONTINUUM AND ACCESS TO EXTERNAL FINANCE
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FIRM CONTINUUM AND ACCESS TO EXTERNAL FINANCE
LPC Coverage
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FIRM CONTINUUM AND ACCESS TO EXTERNAL FINANCE
Mid-sized firms
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FIRM CONTINUUM AND ACCESS TO EXTERNAL FINANCE
Large Firms
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THE RELEVANCE OF ACCESS
• Much research attention to individual
markets
– Relatively little attention to the choice of access
across all markets
– A lack of a complete understanding of why and
when firms access different markets (and different
combinations of markets) may hinder our analysis
of individual markets
• The Saunders and Steffen paper partially
moves in the direction
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COMMENTS ON SPECIFIC PAPERS
• Cai paper
– I’m a bit puzzled by the information asymmetry
results
• The reciprocity effect appears to be as
important for transparent firms
• But, transparent firms don’t need as much
monitoring
• Therefore, reciprocity (and other mitigation
tools would seem less important)
– May want to consider treating CP back-up L/Cs as
a different animal
• Again, context matters
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COMMENTS ON SPECIFIC PAPERS (cont.)
• Bushman, Smith and Wittenberg-Moerman
– I would like to see more discussion of the linkage
between the information generated by the
arranger and institutional investor exploitation
• Discovery speed enhanced by stronger banking
relationships – BUT, relationship lending produces soft
information that cannot be easily transmitted
• How do institutional investors exploit the information?
– Institutional investors nested in large mutual fund
families? (e.g., Berzins, Liu and Trzcinka 2008)
– Connection with Cai paper:
• The stronger the solution to the moral hazard problem,
the more info to exploit!
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COMMENTS ON SPECIFIC PAPERS (cont.)
• Saunders and Steffen
– I’m not sure whether this is an equilibrium story
or a disequilibrium story
• Are firms leaving money on the table by not going
public?
• Or, does the association between the private-public
spread and opacity suggest that opacity is a cause of
not going public rather than an effect?
– I would be careful in comparing the effect of
banking relationships between large and small
firms
• Some evidence suggests that the type/nature of
relationships quite different between large and small
firms in the LPC data set (Gopalan, Udell and Yerrimilli
2008)
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CONCLUSION
• The LPC Dealscan dataset has given us a
tremendous window into corporate
financing.
• These three papers have significantly added
to our knowledge of external financing.
• Must read for LPC “groupies” like me!
– Must read for anyone interested in corporate
finance
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