Working Paper: NBER ID: w17856
Authors: Jongha Lim; Bernadette A. Minton; Michael S. Weisbach
Abstract: The past decade has seen significant changes in the structure of the corporate lending market, with non-commercial bank institutional investors playing larger roles than they historically have played. In addition, non-commercial bank institutional lenders are often equity holders in their borrowing firms. In our sample of 11,137 tranches of institutional "leveraged" loans, 2,008 (18%) have a non-commercial bank institution that also owns at least 0.1% of the firm's equity. Such "dual holder" loan tranches have higher spreads than otherwise similar loan tranches without equity holder participation. The dual holder premium is present for both revolver and term loans, and exists within all non-investment grade credit rating classes. Contrary to risk-based explanations of this finding, dual holder tranches are priced with premiums relative to other tranches of the same loan package. Dual holding premiums are higher when the equity-holder's stake is larger, when the dual-holder's share in the loan is larger, and when the equity holder is a hedge fund or a private equity fund. These premiums likely represent additional compensation to dual holders for providing capital to firms when the firms are having difficulty raising capital otherwise.
Keywords: Institutional Lending; Equityholding; Loan Spreads
JEL Codes: G21; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Dual holder loan tranches (G19) | higher loan spreads (G21) |
| Dual holder participation (D16) | higher loan spreads (G21) |
| Size of equity stake held by institutional lender (G21) | dual holder premium (Y20) |
| Size of loan tranche (F34) | dual holder premium (Y20) |
| Dual holder premium (Y20) | compensation for providing capital (J30) |
| Presence of dual holders (D52) | quicker spending of raised capital (G31) |