Working Paper

What Do Lead Banks Learn from Leveraged Loan Investors?

Abstract: In leveraged loan deals, lead banks use bookbuilding to extract price-relevant information from syndicate participants. This paper examines the content of such information. We find that pricing adjustments during bookbuilding are highly informative, not only about investors’ required risk premium but also about borrower quality. A one-percentage-point increase in loan spread predicts a 0.8% higher excess return, a proxy for risk premium, over the first 3 months of secondary market trading. More importantly, it also predicts a 3% higher probability of subsequent default, implying that investors have private information about borrower quality that is unknown to the lead bank. Our findings suggest a new view of how information asymmetries affect syndicated lending.

Keywords: syndicated loans; leveraged loans; underwriting;

JEL Classification: G23; G24; G30;

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Bibliographic Information

Provider: Federal Reserve Bank of Chicago

Part of Series: Working Paper Series

Publication Date: 2023-11

Number: WP 2023-44