Why borrowers pay premiums to larger lenders : empirical evidence from sovereign syndicated loans

All other terms being equal (e.g. seniority), syndicated loan contracts provide larger lending compensations (in percentage points) to institutions funding larger amounts. This paper explores empirically the motivation for such a price design on a sample of sovereign syndicated loans in the period 1990-1997. I find strong evidence that a larger premium is associated with higher renegotiation probability and information asymmetries. It hardly has any impact on the number of lenders though. This is consistent with the hypothesis that larger lenders act as main lenders, namely help reduce information asymmetries and provide services in situations of liquidity shortage. This constitutes new evidence of the existence of compensations for such unique services. Moreover, larger payment discrepancies are also associated with larger syndicated loan amounts. This provides further new evidence that larger borrowers bear additional borrowing costs

Bank loans non-linear structure of pricing: empirical evidence from sovereign debts

The paper suggests an innovative contribution to the investigation of banking liabilities pricing contracted by sovereign agents. To address fundamental issues of banking, the study focuses on the determinants of the up-front fees (the up-front fee is a charge paid out at the signature of the loan arrangement). The investigation is based on a uniquely extensive sample of bank loans contracted or guaranteed by 58 less-developed countries sovereigns in the period from 1983 to 1997. The well detailed reports allow for the calculation of the equivalent yearly margin on the utilization period for all individual loan. The main findings suggest a significant impact of the renegotiation and agency costs on front-end borrowing payments. Unlike the sole interest spread, the all-in interest margin better takes account of these costs. The model estimates however suggest the non-linear pricing is hardly associated with an exogenous split-up intended by the borrower and his banker to cover up information. Instead the up-front payment is a liquidity transfer as described by Gorton and Kahn (2000) to compensate for renegotiation and monitoring costs. The second interesting result is that banks demand payment for all types of sovereign risk in an identical manner public debt holders do. The difference is that, unlike bond holders, bankers have the possibility to charge an up-front fee to compensate for renegotiation costs. Hence, beyond the information related issues, the higher complexity of the pricing design makes bank loan optimal for lenders on sovereign capital markets, especially relative to public debt, thus motivating for their presence. The paper contributes to the expanding literature on loan syndication and banking related issues. The study also has relevance for the investigation of the developing countries debt pricing

Price discrimination on syndicated loans and the number of lenders : empirical evidence from the sovereign debt syndication

Syndicated loans and the number of lending relationships have raised growing attention. All other terms being equal (e.g. seniority), syndicated loans provide larger payments (in basis points) to lenders funding larger amounts. The paper explores empirically the motivation for such a price discrimination on sovereign syndicated loans in the period 1990-1997. First evidence suggests larger premia are associated with renegotiation prospects. This is consistent with the hypothesis that price discrimination is aimed at reducing the number of lenders and thus the expected renegotiation costs. However, larger payment discrimination is also associated with more targeted market segments and with larger loans, thus minimising borrowing costs and/or attempting to widen the circle of lending relationships in order to successfully raise the requested amount. JEL Classification: F34, G21, G33 This version: June, 2002. Later version (october 2003) with the title: "Why Borrowers Pay Premiums to Larger Lenders: Empirical Evidence from Sovereign Syndicated Loans" : http://publikationen.ub.uni-frankfurt.de/volltexte/2005/992

Courts and sovereign eurobonds : credibility of the judicial enforcement of repayment

While focusing on the protection of distressed sovereigns, the current debate intended to reform the International Financial Architecture has hardly addressed the protection of creditors rights that varies among laws. I suspect however that this constitutes an essential determinant of the success of suggested solutions, especially under the contractual approach. Based on a sample of bonds issued by developing countries states in the period, January 1987 to December 1997, I find that, for given contract characteristics (e.g. listing markets and currency), the governing law is selected according to its ability to enforce repayment. However, although the New York law seems looser and incur larger enforcement costs than the England&Wales law, the former permits equivalent yearly credit amounts. I interpret this as a consequence of the existence of a larger set of valuable assets (e.g. trade) in the US that constitute implicit securities. My findings yield important implications for the reforms. In particular, provided that there exists a seemingly equivalent enforcement credibility between England and New York laws, the prompt implementation of the contractual approach solution should constitute a valuable first step toward efficient sovereign debt markets. October 2003

Courts and Sovereign Eurobonds: Credibility of the Judicial Enforcement of Repayment

While focusing on the protection of distressed sovereigns, the current debate intended to reform the International Financial Architecture has hardly addressed the protection of creditors rights that varies among laws. I suspect however that this constitutes an essential determinant of the success of suggested solutions, especially under the contractual approach. Based on a sample of bonds issued by developing countries states in the period, January 1987 to December 1997, I find that, for given contract characteristics (e.g. listing markets and currency), the governing law is selected according to its ability to enforce repayment. However, although the New York law seems looser and incur larger enforcement costs than the England&Wales law, the former permits equivalent yearly credit amounts. I interpret this as a consequence of the existence of a larger set of valuable assets (e.g. trade) in the US that constitute implicit securities. My findings yield important implications for the reforms. In particular, provided that there exists a seemingly equivalent enforcement credibility between England and New York laws, the prompt implementation of the contractual approach solution should constitute a valuable first step toward efficient sovereign debt markets.Law and Finance, Sovereign Debt Restructuring Mechanism, Collective Action Clause, Bankruptcy, Creditor Rights Protection

Bank Loans Non-Linear Structure of Pricing: Empirical Evidence from Sovereign Debts

The paper suggests an innovative contribution to the investigation of banking liabilities pricing contracted by sovereign agents. To address fundamental issues of banking, the study focuses on the determinants of the up-front fees (the up-front fee is a charge paid out at the signature of the loan arrangement). The investigation is based on a uniquely extensive sample of bank loans contracted or guaranteed by 58 less-developed countries sovereigns in the period from 1983 to 1997. The well detailed reports allow for the calculation of the equivalent yearly margin on the utilization period for all individual loan. The main findings suggest a significant impact of the renegotiation and agency costs on front-end borrowing payments. Unlike the sole interest spread, the all-in interest margin better takes account of these costs. The model estimates however suggest the non-linear pricing is hardly associated with an exogenous split-up intended by the borrower and his banker to cover up information. Instead the up-front payment is a liquidity transfer as described by Gorton and Kahn (2000) to compensate for renegotiation and monitoring costs. The second interesting result is that banks demand payment for all types of sovereign risk in an identical manner public debt holders do. The difference is that, unlike bond holders, bankers have the possibility to charge an up-front fee to compensate for renegotiation costs. Hence, beyond the information related issues, the higher complexity of the pricing design makes bank loan optimal for lenders on sovereign capital markets, especially relative to public debt, thus motivating for their presence. The paper contributes to the expanding literature on loan syndication and banking related issues. The study also has relevance for the investigation of the developing countries debt pricing.Private debt, Sovereign debt, Syndicated loans, Up-front fees, Non-linear pricing design

Why Borrowers Pay Premiums to Larger Lenders: Empirical Evidence from Sovereign Syndicated Loans

All other terms being equal (e.g. seniority), syndicated loan contracts provide larger lending compensations (in percentage points) to institutions funding larger amounts. This paper explores empirically the motivation for such a price design on a sample of sovereign syndicated loans in the period 1990-1997. I find strong evidence that a larger premium is associated with higher renegotiation probability and information asymmetries. It hardly has any impact on the number of lenders though. This is consistent with the hypothesis that larger lenders act as main lenders, namely help reduce information asymmetries and provide services in situations of liquidity shortage. This constitutes new evidence of the existence of compensations for such unique services. Moreover, larger payment discrepancies are also associated with larger syndicated loan amounts. This provides further new evidence that larger borrowers bear additional borrowing costs.Relationship Lending; Number of Lenders; Syndicated loans; Sovereign Debt

European Bond Issuers

The recent financial and sovereign crises emphasised the need to further integrate the European financial system. In particular, the overreliance on bank financing coupled with a segmented financial system affected corporate growth in an uneven fashion across countries, thus widening existing economic gaps. The European Banking Union constitutes a major step towards integration; the construction of the Capital Markets Union comes next in the policy agenda. In 2015, the Juncker Commission launched a vast programme of reforms with the purpose to enhance the European Capital Market Union. The Action Plan on Building a Capital Market Union mentions the easier access to capital markets across Europe as a major objective in the construction, and the first of the three stated objectives of the Capital Market Union is to “broaden the sources of financing in Europe towards nonbank financing by giving a stronger role to capital markets.” This study aims at contributing to the Capital Market Union plan by providing an analysis of the European non-financial companies, which issue bonds. Bonds are debt instruments traded in markets, and constitute a traditional alternative to bank loans. The study investigates the characteristics of bond issuers as well as the respective bond terms, in the period 2004-2015. We use the databank of bonds published by Dealogic DCM, that we linked to Bureau van Dijk ORBIS to extract financial information about bond issuers. Our findings show first that the crisis led to a contraction of the bond amounts issued and to a shortening of the maturities; yet, in the aftermath of the crisis, riskier companies issued larger bond amounts. Second, bond issuers are significantly different from non-bond issuers; for instance, they are larger and older, and listed firms are more likely to issue bonds. Differences are comparable whether we consider the full sample, the sample of large firms, or the sample of listed companies. Yet, leverage is an exception: consistently with previous studies, we do find that among listed firms, bond issuers are more leveraged; the difference vanishes as we consider the full sample. Last, investigating bond terms, we find that larger companies are likely to have more balanced maturity term structures of bonds. The reports suggest a number of variations among corporations and bond terms over time, which should be subject to further analysis.JRC.B.1-Finance and Econom

Job Creation in Europe: A firm-level analysis

This note reports an innovative state-of-the-art empirical analysis of Job Creation in the European Union in the same vein as the classical studies in the United States. It is based on an exceptionally large sample of firm-level employment data in the period 2004-2015 obtained from Orbis, a databank published by Moody’s Bureau van Dijk. Consistently with our representiveness assessment, the final sample consists of firms registered in 20 out of the 28 EU Member States. The study follows the empirical literature and defines three indicators which may be equally plausible policy objectives. The job creation [destruction] is the total number of jobs created [destroyed] by growing [shrinking] firms and reflects the job turnover of a market and its capacity to enhance the labour market dynamism. The net job creation is the difference between job creation and job destruction and captures the employment growth. The net job creation rate is the employment growth rate and reflects the capacity of firms of being efficient in creating new jobs. The main findings are as follows: - The young-SME category is the largest contributor to net job creation (employment growth). Moreover, its contribution to job creation amounts to 40 percent which is far larger than its share in employment amounting to 15 percent. - The share of start-up firms in employment varies between 2 and 9 percent across countries with new Member States typically exhibiting larger shares. Even though to various degrees, nearly all Member States have experienced a decline of start-ups measured as the share of employment. - With nearly 60%, high-growth firms (HGF) exhibit the largest incidence on total job creation. Even though the young HGFs are more numerous, mature HGFs contribute to job creation to a larger extent. - Firms borrowing for the first time report net job creation rates of about 8 percent higher in the next three years, on average. Besides, the net job creation rates of firms with bank loans are less sensitive to economic cycles. The results yield a number of policy implications. In particular, they provide empirical support to policies aimed at encouraging young firms and entrepreneurship in Europe. They also show that job creation of SME may face obstacles in their "scaling-up" development phase. Last, the impact of external financing on net job creation rates may vary among Member States -- especially through the business cycles. These results deserve further investigation. By providing a large-scale investigation of job creation in Europe and providing related policy tools, the report aims to contribute to the European Commission’s first priority, "to boost jobs, growth and investment."JRC.B.1-Finance and Econom