BANKING RELATIONSHIPS IN LOAN MARKETS

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BANKING RELATIONSHIPS INLOAN 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 THREADTHE 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 Natl Credit
  Program (gt 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 CI Outsdandings (2008) 1,418
  billion

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THE COMMON DATA SOURCEDEALSCAN 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
• 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
• Im a bit puzzled by the information asymmetry
  results
• The reciprocity effect appears to be as important
  for transparent firms
• But, transparent firms dont 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
• Im 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