Working Paper: CEPR ID: DP16452
Authors: Mariassunta Giannetti; Ralf Meisenzahl
Abstract: Regulation and capital constraints may force banks and collateralized loan obligations (CLOs) to sell deteriorating loans, potentially hampering renegotiation and amplifying the initial negative shock to the borrower. We show that banks and CLOs sell downgraded loans to mutual funds and hedge funds. The reallocation of loan shares favors the syndicate's concentration increasing lenders' incentives to renegotiate. However, syndicates remain less concentrated when potential buyers experience financial constraints and subsequently loans are less likely to be amended and more likely to be downgraded even further. Our findings indicate that existing regulations may amplify shocks to credit quality during periods of generalized distress in the financial system.
Keywords: debtor concentration; credit quality; leveraged lending
JEL Codes: G21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| financial distress among potential buyers (G51) | concentration of ownership in syndicated loans (G32) |
| concentration of ownership in syndicated loans (G32) | loan outcomes (G51) |
| selling deteriorating loans (G21) | further deterioration in loan quality (G33) |
| concentration of ownership among lenders (G32) | incentives for renegotiation (D86) |
| financial constraints of potential buyers (D10) | likelihood of loan amendments (G21) |
| more dispersed ownership (G39) | likelihood of loan amendments (G21) |
| existing regulations (L51) | shocks to credit quality during systemic financial distress (E44) |