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Board of Governors of the Federal Reserve System (US)
Finance and Economics Discussion Series
Pipeline Risk in Leveraged Loan Syndication
Max Bruche
Frederic Malherbe
Ralf R. Meisenzahl
Abstract

Leveraged term loans are typically arranged by banks but distributed to institutional investors. Using novel data, we find that to elicit investors' willingness to pay, arrangers expose themselves to pipeline risk: They have to retain larger shares when investors are willing to pay less than expected. We argue that the retention of such problematic loans creates a debt overhang problem. Consistent with this, we find that the materialization of pipeline risk for an arranger reduces its subsequent arranging and lending activity. Aggregate time series exhibit a similar pattern, which suggests that the informational friction we identify could amplify the credit cycle.


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Max Bruche & Frederic Malherbe & Ralf R. Meisenzahl, Pipeline Risk in Leveraged Loan Syndication, Board of Governors of the Federal Reserve System (US), Finance and Economics Discussion Series 2017-048, 06 Apr 2017.
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Subject headings:
Keywords: Debt Overhang ; Lead Arranger Share ; Leveraged Loans ; Pipeline Risk ; Syndicated Loans
DOI: 10.17016/FEDS.2017.048
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