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Discussion Paper
Financial Stability and the Coronavirus Pandemic
The Atlanta Fed recently helped organize a conference titled "Financial Stability and the Coronavirus Pandemic." The conference had three sessions devoted to problems focusing on various aspects of how the markets for corporate credits responded to the COVID-19 shock including corporate bond investment funds, the corporate bond market, and the corporate loan market. This article summarizes some of the important findings of the papers presented at the conference.
Working Paper
EBITDA Add-backs in Debt Contracting: A Step Too Far?
Financial covenants in syndicated loan agreements often rely on definitions of EBITDA that deviate from the GAAP definition. We document the increased usage of non-GAAP addbacks toEBITDA in recent times. Using the 2013 Interagency Guidance on Leveraged Lending, which we argue led to an exogenous increase in non-GAAP EBITDA addbacks, we show that these addbacksincrease the likelihood of loan delinquency and default, and also increase the likelihood of the borrower experiencing a ratings downgrade. Greater use of non-GAAP EBITDA addbacks also makes it more likely that lead arrangers lower their ...
Newsletter
How central bank swap lines affect the leveraged loan market
The cost of borrowing U.S. dollars through foreign exchange (FX) swap markets increased significantly at the beginning of the Covid-19 pandemic in February 2020, indicated by larger deviations from covered interest rate parity (CIP). CIP deviations narrowed again when the Federal Reserve expanded its swap lines to support U.S. dollar liquidity globally—by enhancing and extending its swap facility with foreign central banks and introducing the new temporary Foreign and International Monetary Authorities (FIMA) repurchase agreement facility for foreign and international monetary authorities. ...
Journal Article
Financial Stability and the Coronavirus Pandemic
The Atlanta Fed recently helped organize a conference titled “Financial Stability and the Coronavirus Pandemic.” The conference had three sessions devoted to problems focusing on various aspects of how the markets for credits responded to the COVID-19 shock including corporate bond investment funds, the corporate bond market, and the corporate loan market. This article summarizes some of the important findings of the papers presented at the conference.
Journal Article
Do Adverse Oil Price Shocks Change Loan Contract Terms for Energy Firms?
This article examined whether the relationship between creditworthiness and loan spreads for energy firms in the syndicated loan market changed after the 2014 oil-price shock. {{p}} The authors use syndicated loans, which are jointly funded by several financial institutions, because the syndicated loan market is a major source of debt financing for oil firms. Credit conditions tightened following the oil-price shock in mid-2014.
Working Paper
The U.S. Syndicated Loan Market: Matching Data
We introduce a new software package for determining linkages between datasets without common identifiers. We apply these methods to three datasets commonly used in academic research on syndicated lending: Refinitiv LPC DealScan, the Shared National Credit Database, and S&P Global Market Intelligence Compustat. We benchmark the results of our match using results from the literature and previously matched files that are publicly available. We find that the company level matching is enhanced by careful cleaning of the data and considering hierarchical relationships. For loan level matching, a ...
Working Paper
What Do Lead Banks Learn from Leveraged Loan Investors?
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 ...
Working Paper
Risk Taking and Low Longer-term Interest Rates: Evidence from the U.S. Syndicated Loan Market
We use supervisory data to investigate risk taking in the U.S. syndicated loan market at a time when longer-term interest rates are exceptionally low, and we study the ex-ante credit risk of loans acquired by different types of lenders, including banks and shadow banks. We find that insurance companies, pension funds, and, in particular, structured-finance vehicles take higher credit risk when investors expect interest rates to remain low. Banks originate riskier loans that they tend to divest shortly after origination, thus appearing to accommodate other lenders' investment choices. These ...
Working Paper
Financial Crises and the Composition of Cross-Border Lending
We examine the composition and drivers of cross-border bank lending between 1995 and 2012, distinguishing between syndicated and non-syndicated loans. We show that on-balance sheet syndicated loan exposures, which account for almost one third of total cross-border loan exposures, increased during the global financial crisis due to large drawdowns on credit lines extended before the crisis. Our empirical analysis of the drivers of cross-border loan exposures in a large bilateral dataset leads to three main results. First, banks with lower levels of capital favor syndicated over other kinds of ...
Working Paper
The Dollar and Corporate Borrowing Costs
We show that U.S. dollar movements affect syndicated loan terms for U.S. borrowers, even for those without trade exposure. We identify the effect of dollar movements using spread and loan amount adjustments during the syndication process. Using this high-frequency, within loan variation, we find that a one standard deviation increase in the dollar index increases spreads by up to 15 basis points and reduces loan amounts and underpricing by up to 2 percent and 7 basis points, respectively. These effects are concentrated in dollar appreciations. Our results suggest that global factors reflected ...