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

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

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

A Product-Quality View of the Linder Hypothesis

The Linder hypothesis states that countries of similar income per capita should trade more intensely with one another. This hypothesis has attracted substantial research over decades, but the empirical evidence has failed to provide consistent support for it. This paper shows that the reason for the failure is the use of an inappropriate empirical benchmark, the gravity equation estimated using trade data aggregated across sectors. The paper builds a theoretical framework in which, as in Linder's theory, product quality plays the central role. A formal derivation of the Linder hypothesis is obtained, but this hypothesis is shown to hold only if it is formulated as a sector-level prediction. The "sectoral Linder hypothesis" is then estimated on a sample of 64 countries in 1995. The results support the prediction: after controlling for inter-sectoral determinants of trade, countries of similar per-capita income trade more intensely with one another. The paper also shows that a systematic aggregation bias explains the failure of the previous empirical literature to find support for Linder's theory.

Specialization, Factor Accumulation and Development

We estimate the effect of factor proportions on the pattern of manufacturing specialization in a cross-section of OECD countries, taking into account that factor accumulation responds to productivity. We show that the failure to control for productivity differences produces biased estimates. Our model explains 2/3 of the observed differences in the pattern of specialization between the poorest and richest OECD countries. However, because factor proportions and the pattern of specialization co-move in the development process, their strong empirical relationship is not sufficient to determine whether specialization is driven by factor proportions, or by other mechanisms also correlated with level of development.