Research-based policy commentary and analysis from leading economists
From credit risk to pipeline risk: Why loan syndication is just a dangerous company
Max Bruche, Frederic Malherbe, Ralf R Meisenzahl 11 September 2017
Syndicated loan issuance has exploded significantly during the last 25 years. The syndicated loan business model has evolved, affecting the nature of the associated risks that arranging banks are exposed to over the period. This column presents the idea of ‘pipeline’ risk –the risk linked with advertising the loans through the syndication procedure. Pipeline danger forces organizing banking institutions to carry much bigger stocks of extremely high-risk syndicated term loans, which results in reduced financing because of the bank that is arranging just when you look at the syndicated term loan market, however in other people aswell.
Syndicated loan issuance – for which banks partner along with other institutions that are financial originate big loans – has grown significantly during the last 25 years. In 2016, non-financial corporations borrowed $3.4 trillion globally through the loan that is syndicated, causeing this to be source of funding considerably bigger than the issuance of bonds and equity (see Figure 1). A lot of the expansion in syndicated financing happens to be driven by fundamental alterations in the syndicated term loan market. During the early 1990s, a bank that arranged a loan that is syndicated along with other banking institutions to create the expression loan syndicate, and also the organizing banks kept an amazing share regarding the loan (20–30%) on its books. Aided by the rise of this originate-to-distribute-to-nonbanks model in addition to market that is secondary syndicated loans, institutional investors such as for example shared funds and collateralised loan responsibilities started initially to offer extra money for the syndicated term loan market (Bord and Santos 2012). Continue reading “Syndicated loan issuance has exploded significantly over the past 25 years.”