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University!of!Amsterdam!
!!!!Amsterdam!Business!School!!
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Master!in!International!Finance!
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Syndicated!Loan!and!Renegotiation:!
!!Effect!of!Membership!Turnover!on!Renegotiation!Term!
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!!!!!!!!!Gerald!I!Lesar!11196181!
!!!!!!!!!!!!!!!!!!!August!2017!
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!!!!!!Thesis!supervisor:!Dr.!Tomislav!Ladika!!
Abstract(
(This! paper! examines! the! turnover! trends! on! private! credit! market! in! the! US! and! its! effect! on! loan! principal,! markup! rate,! and! duration.! ! Using! US! loan! market! data! for! publicly!listed!company!from!1996!to!2015,!the!study!finds!on!average!there!is!above! 40%!turnover!of!members!leaving!original!syndicate!membership!and!20%!turnover!of! nonQbank! institutions! enter! membership! every! time! the! membership! changes! take! place.!Besides,!it!is!estimated!that!renegotiation!terms!increase!above!30%,!15%,!and! 20%! for! loan! principal,! duration,! and! markup! rate! respectively.! The! analysis! is! done! using!linear!regression!and!this!is!analyzed!by!adding!borrowers’!quality!and!presence! of!nonQbank!institutions,!which!is!believed!to!have!limited!information!on!borrower!as! control! variables.! Based! on! empirical! studies,! turnovers! have! positive! effect! on! renegotiation! term! and! the! effect! of! turnovers! on! renegotiation! terms! are! different! depending! on! the! number! of! uninformed! members! in! syndicated! membership.! The! output! indicate! that! every! time! there! is! changes! in! syndicated! loan! ownership! and! renegotiation,!the!amount!of!loan!will!increase!along!with!the!loan!maturities!but!the! borrowers! have! to! pay! more! interest! as! the! consequence.! Besides,! when! syndicate! membership! has! more! uninformed! members! the! increase! on! loan! duration! will! be! lower! and! increase! on! loan! principal! and! markup! will! be! higher! compare! to! the! syndicate!membership!with!less!uninformed!members.!!!
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1.! Introduction(...(4! 2.! Literature(Review(...(7! 3.! Methodology(...(11! 4.! Data(...(15! 5.! Empirical(Research(...(20! 6.! Conclusions(...(25! References(...(28! Appendices(...(30! ! ! ! ! ! ! ! !
1. Introduction(
(Syndication!loans!have!become!important!source!of!finance!for!corporate.!According!to! (Champagne! &! Kyzanowski,! 2007),! the! global! transaction! of! syndication! loan! for! large! and! medium! size! companies! has! totaled! three! trillions! dollar.! ! Weidner! (2000)! mentioned,! syndicated! lending! represent! 51%! of! US! corporate! finance! originated,! and! generates!more!underwriting!revenue!for!the!financial!sector!than!both!equity!and!debt! underwriting.! ! The! market! for! syndicated! loan! has! experienced! strong! growth,! going! from!$137!million!in!1987!to!over!$1!trillion!today!(Sufi,!2007).!
Sufi!(2007)!defines!syndicated!loan!as!a!loan!whereby!at!least!two!lenders!jointly!offer! funds! to! a! borrowing! firm.! During! the! loan! period! from! origination! to! the! end! of! the! loan,! changes! of! syndicated! lenders! occur! overtime.! The! changes! are! determined! by! many!factors!and!it!effect!loan!renegotiations!term.!!According!to!Robert!&!Sufi!(2009)! from!1000!private!credit!agreement!between!1996!and!2005,!75%!of!the!contract!are! renegotiated!and!have!major!changes!in!the!contract!term.!It!shows!the!importance!of! renegotiation!as!part!of!dynamic!in!syndicated!loan.!A!study!by!Drucker!&!Puri!(2009)!on! secondary!loan!market!shows!that!changes!of!ownership!leads!to!stricter!the!contract! term.! Based! on! these! findings! further! research! on! membership! changes! affects! renegotiation!is!conducted!through!the!turnover!of!syndicated!members.!
Little! is! known! about! syndicate! member! turnover! or! how! the! dynamic! the! syndicated! membership.!The!studies!on!syndication!membership!mainly!focus!on!determinants!on! syndicate! members! formations! and! dynamic! syndicate! members’! roles! on! loan! syndication.!A!study!from!(Sufi,!2007)!contends!that!previous!relationships!between!the! lead!arranger!and!potential!participants!do!affect!future!alliances!between!the!lenders.! The! extended! study! by! (Champagne! &! Kyzanowski,! 2007)! examines! the! nature! of! ongoing!relationship!between!syndicate!members.!Due!to!limited!study!on!renegotiation! and!syndicated!membership,!this!research!is!intended!to!examine!the!impact!of!changes!
market! for! publicly! listed! firm.! Over! time! during! the! loan! period,! some! members! may! exit!the!syndicate!and!some!may!enter.!Relationship!between!the!membership!changes! on! renegotiation! will! be! the! focus! of! the! study! this! will! be! done! through! measuring! number!of!syndicated!members!leaving!the!syndicated!loan.!!
Moreover,!this!research!will!also!look!into!members’!turnover!in!the!relation!to!agency! problem! between! financial! institutions! as! the! syndicated! member! and! the! borrowers.! The! changes! will! help! examine! information! asymmetry! effect! on! renegotiation! term.!! Sufi! (2007)! found! evidence! that! information! asymmetry! affects! the! structure! of! syndicated!loans!and!the!composition!of!syndicate!members.!!Additionally,!a!study!by! (Jones,! Lang,! &! Nigro,! 2005)! support! the! findings! that! agent! bank’s! informational! advantage!have!a!significant!effect!on!the!share!of!a!loan!retained!by!the!agent!bank.! Other!study!conducted!by!(Drucker!&!Puri,!2009)!examines!secondary!loan!market,!they! focus! on! loan! contracting! as! a! mechanism! to! mitigate! agency! and! informational! problems!in!loan!sales!and!associated!costs!and!benefit.!Based!on!the!studies,!there!is! potential! effect! of! new! members! with! limited! information! of! the! borrower! on! the! renegotiation,!make!them!more!stringent!to!loan!agreement.!Besides,!as!the!lenders!are! believed! to! have! limited! public! information! on! borrowers,! the! public! information! on! quality! of! borrowers! will! also! be! assessed! through! Book! Market! value,! Cash,! Current! Ratio,!Debt!Equity!Ratio,!Income!Growth,!Interest!Coverage!Ratio,!Market!Capitalization,! Rating,!and!Return!on!Asset!in!the!impact!of!term!renegotiation.!
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In!the!case!of!renegotiation,!this!refers!to!changes!of!loan!agreement!that!governs!the! term! of! syndicated! and! sole! lender! loans.! Renegotiation! is! an! amendment! process! of! initial!loan!agreement.!The!amendments!have!significant!changes!to!the!loan!agreement.! It!is!an!inevitable!process!of!loan!agreement!as!shown!by!study!on!renegotiation!from! (Roberts! &! Sufi,! 2009).! This! research! on! renegotiation! will! examine! the! changes! renegotiation!term!in!respect!to!the!maturity!of!the!loan,!principal,!and!markup!rate!on! the!changes!in!syndicate!member!turnover.!Renegotiation!term!will!be!the!dependent! variable!or!result!of!the!changes!in!syndicate!members!as!the!independent!variable.!This!
is!an!important!study!of!financial!contracting.!During!the!loan!period!before!maturity,! renegotiations! take! places! several! times.! This! research! will! be! developed! to! examine! impact! on! renegotiation,! where! the! presence! of! nonQbanks! member! that! change! between! the! initial! loan! issuance! and! the! amendment! date! impact! the! renegotiation! term.!
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This!research!aims!to!answer!question!on!impact!of!changes!in!syndication!membership! on! renegotiation! terms! and! helps! understand! effects! of! agency! problem! in! renegotiation.!This!will!be!done!using!unique!dataset!of!U.S!loan!renegotiation!between! 1996! to! 2015! extracted! from! Thomson! One.! Regression! analysis! will! be! performed! by! calculating! the! number! of! members! leaving! the! syndicate! and! regressed! with! the! percentage!changes!in!the!loan!principal,!maturity,!and!markup!rate.!The!turnover!then! will! be! the! independent! variable! and! loan! principal,! markup! and! duration! as! the! dependent!variable.!!Some!additional!independent!variables!are!introduced!as!control! variable!in!the!regression!equation!that!will!be!borrower!quality!and!types!of!member! within!syndicated!loan.!!
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The! research! finds! that! turnover! has! positive! impact! on! loan! principal,! duration,! and! interest!rate.!This!shows!changes!in!the!loan!ownership!result!to!an!increase!in!the!loan! amount!to!borrowers!with!longer!duration!but!it!costs!more!for!borrowers.!The!impacts! of! turnovers! on! renegotiation! terms! are! different! depending! on! the! number! of! uninformed! members/nonQbanks! in! syndicated! membership.! The! increase! on! loan! duration!will!be!lower!and!increase!on!loan!principal!and!markup!will!be!higher!when! syndicate! membership! has! additional! uninformed! members! compare! to! the! syndicate! membership! with! no! additional! uninformed! members.! These! findings! partly! align! with! the!theory.!The!analysis!from!the!borrowers’!quality!does!not!really!show!that!the!loan! covenants! get! stricter! even! though! the! markup! increase,! but! the! loan! amount! and! duration!are!also!increase.!However,!the!result!from!analysis!on!presence!of!uninformed! members! indicate! that! turnover! create! information! asymmetry! about! the! borrowers!
when!membership!has!additional!uninformed!members.!The!turnover,!may!benefit!the! borrowers! but! the! benefit! decreases! when! syndicate! membership! has! additional! uninformed!member!during!renegotiation.!! ! The!reminder!of!the!study!is!structured!as!follows:!Section!2!presents!relevant!studies!of! this!research,!Section!3!provides!details!on!data!collection!and!process!for!the!analysis,! Section!4!contains!the!result!of!empirical!research,!and!followed!with!the!conclusion!in! Section!5.!!!
2. Literature(Review(
( Syndication!loan!has!grown!rapidly!for!the!past!few!decades.!Many!financial!institutions! have! benefited! from! the! growth! of! syndicated! loan! market.! According! to! Pennachi! (1988),! loan! syndications! are! a! costQeffective! method! for! participating! institutions! to! diversify! their! banking! books! and! to! exploit! any! funding! relative! agent! banks.! Additionally,!Jones,!Lang!and!Nigro!(2005)!contend!that!syndicated!lending!also!allows! banks!to!compete!more!effectively!with!public!debt!markets!for!corporate!borrowers.!!!
Cooperation! between! financial! institutions! is! needed! to! benefit! from! syndicated! loan.! Over!the!time!of!syndicated!loan,!some!members!may!leave!the!loan!and!some!may!join! the! membership.! Based! on! the! study! of! Drucker! and! Puri! (2009)! it! is! found! that! the! original!member!may!leave!the!loan!when!they!know!the!borrowers!are!likely!to!perform! poorly.! Besides,! reasons! some! of! agents! joint! the! loans! is! cost! efficiency! for! the! new! entrants!since!originate!a!loan!is!complex!and!expensive.!Therefore,!the!membership!of! syndicated! loan! is! not! constant! and! changes! based! on! the! economic! situation! of! both! borrowers!and!lenders.!!
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Changes! on! syndicated! member! have! a! direct! effect! on! the! changes! in! the! loan! covenant.! It! is! proven! from! A! study! by! ! Drucker! and! Puri! (2009)! on! secondary! loan! market!shows!that!sold!loans!have!significantly!more!covenants!than!loans!that!are!not!
sold.!!Their!study!focus!on!loan!contract!as!a!way!to!diminish!agency!and!informational! problems! in! loan! sales.! They! argue! that! loan! selling! may! exacerbate! agency! problem! between!lenders!and!borrowers,!as!the!new!lenders!that!buy!loans!are!likely!to!have!less! borrower!specific!information!an!ability!to!monitor!the!borrower.!A!supporting!study!by! Rajan! and! Winton! (1995)! shows! that! covenants! provide! an! incentive! to! monitor! the! borrower!and!according!to!Berlin!and!Loeys!(1988)!it!can!be!cheaper!a!cheaper!way!to! monitor! the! borrower.! Similarly,! Dichev! and! Skinner! (2002)! and! Bradley! and! Roberst! (2015)! contend! that! to! limit! borrower’s! moral! hazard,! covenants! are! designed! to! monitor!the!firm.!By!tightening!loan!covenants,!this!will!provide!loan!buyers!a!way!to! monitor! the! firm! and! allow! buyers! limit! their! losses! when! a! borrower! performs! unexpectedly! poorly.! Therefore,! there! is! possibility! when! the! loans! are! tradable! to! change!the!ownership,!the!sold!loans!have!feature!to!improve!loan!liquidity.!!
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The!advent!of!new!member!with!less!informed!about!borrower!will!extend!the!agency! problem.!Drucker!and!Puri!(2009)!argue!that!this!agency!problem!is!greater!due!to!most! loans! are! originated! by! commercial! banks! that! have! ability! to! produce! private! information! on! borrower! quality,! which! also! studied! before! by! Diamond! (1984),! Ramakrishnan!and!Thakor!(1984),!Fama!(1985),!Boyd!and!Prescott!(1986),!and!Diamon! (1991).!Drucker!and!Puri!statement!is!supported!by!Simons!(1993)!that!loan!participants! should!perform!their!own!credit!analysis,!but!in!practice!they!normally!rely!on!the!loan! documentation! provided! by! the! agent! bank.! Furthermore,! Drucker! and! Puri! (2009)! contend! that! in! debt! markets,! borrowers! and! lenders! are! not! likely! to! be! equally! informed.! Borrowers! have! an! incentive! to! misreport! their! quality! to! lenders! at! loan! origination! and,! after! receiving! loans,! borrowers! may! attempt! to! expropriate! wealth!from!lenders.!Theory!suggests!that!lenders!can!limit!the!negative!effects!of!the! borrower's!information!advantage!by!including!covenants!in!the!loan!contract.!!
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A! supporting! study! on! informational! asymmetry! by! Sufi! (2007)! shows! information! asymmetry! between! lenders! and! borrowers! influences! syndicate! structure.! A! basic!
assumption! is! that! firms! with! limited! public! information! require! due! diligence! and! monitoring! by! an! “informed”! lender! before! “uninformed”! lenders! invest! in! the! firm.! Besides,!new!member!with!limited!information!of!the!firm!might!response!differently!to! the!loan!covenants.!This!covenant!changes!are!incentives!to!informational!asymmetry.! New!members!tend!to!be!more!stringent!to!the!loan!since!information!provided!of!the! firm!is!limited.!
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Renegotiation! in! loan! contracting! is! normally! used! to! resolve! borrower! lender! related! problems.!In!the!study!by!Roberts!and!Sufi!(2009)!on!private!credit!agreement!they!show! that!almost!all!the!sample!are!renegotiated!prior!to!maturity!and!75%!of!the!contracts! have! a! major! contract! term! renegotiated.! Supporting! Ducker! and! Puri’s! (2009)! statements,!Robert!and!Sufi!(2009)!analyze!of!what!triggers!renegotiation,!they!reveal! that!the!accrual!of!new!information!concerning!credit!quality!is!a!strong!predictor!of!the! incidence!and!outcomes!of!renegotiation.!They!found!that!relative!to!the!initial!maturity,! amount,!and!spread!of!the!contract!renegotiation!generate!changes!of!the!contract!for! about!64%,!43%,!and!40%!respectively.!Moreover,!Robert!and!Sufi!(2009)!also!find!that! fluctuations! in! credit! market! conditions,! the! financial! health! of! lenders,! and! the! aggregate!stock!market!play!an!important!role!in!triggering!renegotiation.!
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As!argued!by!Maskin!and!Moore!(1999)!that!renegotiation!happens!due!to!the!rise!of!an! outQofQequilibrium!phenomenon.!Study!on!renegotiation!by!Harris!and!Raviv!(1995)!and! Ahinon! et! al.! (1994)! provide! a! view! on! how! renegotiation! is! design! to! govern! the! behavior!of!contract!participants!in!determining!the!outcomes.!Robert!and!Sufi!(2009)! argue! that! the! original! terms! of! the! contract! play! an! important! role! in! renegotiation! aside!an!accrual!of!new!information!to!the!new!member.!It!is!shown!in!Aghinon!et!al.! (1994)! study! that! when! the! parties! attempt! to! control! renegotiation! process! contractually,! so! that,! for! each! circumstance! the! parties! find! themselves! in,! the! assignment! of! bargaining! power! is! specified! in! the! contract! rather! than! being! given! exogenously.!!
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Unlike!Aghinon!et!al.!,!in!the!study!by!Malitz!(1986)!on!the!role!of!bond!covenants!in! controlling! conflict! of! interest! between! shareholder! and! bondholders,! it! shows! the! importance!of!exogenous!aspect!of!the!contract!on!designing!the!covenant!especially!on! borrowers! capital! structure,! which! also! similar! to! Smith! and! Warner! (1979)! findings.! Malitz! also! finds! that! asymmetric! information! concerning! a! firm’s! investment! opportunity! set! appear! to! play! a! significant! role! in! determining! the! value! of! explicit! covenants.!Besides,!Begely!(1994)!found!that!firms!with!higher!probability!of!bankruptcy,! less!assets!generating,!less!operating!cash!flows,!high!leverage!ratio!are!more!likely!to! include! additional! borrowing! and! when! agency! problems! are! expected! to! be! more! severe,! duration! will! be! shorter! and! restrictive! covenant! will! be! included.! Supporting! study!by!Nash!et!al!(2003)!shows!that!capital!structure!affect!loan!covenants!and!they! found! firm! with! high! growth! opportunity! have! more! restrictive! covenant.! It! is! similar! with! Bradley! and! Roberts! (2015),! they! argue! that! loans! are! more! likely! to! include! protective! covenants! when! the! borrower! is! small,! has! high! growth! opportunities! or! is! highly!levered.!Besides,!they!also!find!that!the!factor!of!covenant!structure!is!not!only! assessed! from! borrowers! perspective! but! also! lenders! characteristics,! as! well! as! macroeconomic!factors.!It!is!supported!by!Goyal!(2005)!that!the!study!found!evidence! that! banks! with! greater! risk! taking! incentives! will! have! more! restrictive! covenants! in! their!debts!contracts.!!
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An! extended! study! of! Robert! (2015)! looks! into! the! dynamics! of! renegotiation.! The! findings! on! the! study! show! that! renegotiations! are! initiated! by! borrowers! primarily! in! response! to! changing! conditions,! as! opposed! to! lender! interventions! due! to! default.! Most! loans! are! renegotiated! multiple! times! over! relatively! short! horizons,! with! each! renegotiation! leading! to! significant! changes! to! the! contract.! The! plurality! of! renegotiations!(46%)!modifies!only!the!covenant!package.!In!fact,!covenants!are!more! likely!to!be!modified!than!other!loan!terms!throughout!the!life!of!the!loan.!The!timing!of! renegotiations! is! governed! by! three! factors:! the! financial! health! of! the! parties! to! the!
loan,! the! uncertainty! regarding! borrowers’! future! profitability,! and! the! outcome! of! renegotiation.!
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Renegotiation!is!inevitable,!based!on!the!findings!when!syndicated!ownership!changes! and!covenant!need!to!be!adjusted!according!to!the!new!members.!!However,!it!is!not! sure! how! often! the! member! changes! and! how! the! covenant! change.! Therefore,! the! changes!frequency!needs!to!be!measured!based!the!turnover!of!the!member!changes.!! Moreover,!since!it!is!clear!that!changes!in!the!ownership!result!to!adjusted!covenants,! but!it!is!not!known!how!big!is!the!impact!the!turnover!on!covenant!adjustment.!I!would! like!to!check!how!changes!in!ownership!impact!the!covenants.!Besides,!it!explains!that! loans!are!sold!when!the!lenders!know!the!performance!of!the!borrowers.!This!is!similar! to!the!incentive!of!renegotiation!where!it!depends!on!the!borrowers!conditions.!!
3. Methodology(
! This!study!intends!to!examine!the!effect!of!turnover!on!renegotiation!terms.!Therefore,! regression! analysis! will! be! used! in! this! study.! The! fundamental! model! for! this! study! is! showed!below! ! !ℎ!"#$!!"#"$%&'(&'%#!!!"#$% = !! + !"#$%&'($ + !! ! Loan!principal!(P),!duration!(D),!and!markup!rate!(M)!are!3!renegotiation!terms!that!is! used!in!this!analysis!as!dependent!variable.!Loan!principal!is!the!amount!of!loan!to!be! borrowed!to!a!firm!measured!in!millions.!Duration!is!loan!period!until!the!loan!mature,! which!is!measured!in!years.!Markup!rate!is!defined!as!interest!rate!charged!to!borrowers! on! the! top! of! base! rate.! Change! Renegotiation! Terms! is! measured! based! on! the! percentage!changes!in!loan!covenant!after!amendment!as!shown!below.!! ! ! =!" − !" !" ×!100!!!!!! = !" − !" !" ×!100!!!!! = !" − !" !" ×!100!! ! !a!and!o!in!the!equations!indicate!renegotiation!terms!value!after!amendment!(a)!and! renegotiation!term!value!at!original!or!before!amendment!(o).!The!purpose!on!having!the! change! renegotiation! terms! in! percentage! is! to! standardize! the! unit! between! the! renegotiation!terms!in!interpreting!the!data.!The!data!for!all!renegotiation!terms!from! Thomson! One! is! very! straightforward,! so! changes! in! renegotiation! terms! can! be! measured!easily.!!
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For!membership!turnover,!it!will!be!measured!differently!to!assess!the!effect!of!turnover! with! control! variable! borrowers! quality! and! control! variable! presence! of! nonQbank.! To! assess! the! turnover! with! borrowers! quality,! turnover! is! measured! in! percentage! by! dividing!the!number!of!member!leave!the!original!syndicated!loan!with!the!total!number! of!original!syndicated!loan!member!and!multiplied!by!100.! ! !"#$%&'#! !" = ! !"#$%&!!"#$"%!!"#$"!!"#$#%&'!!"#$%&'(#!!"#$ !"#$%!!"#$%&!!"!!"#$#%&'!!"#$%&'(#!!"#$!!"#$"%!!!×!100! ! To!assess!turnover!with!presence!of!nonQbank,!turnover!is!measured!in!percentage!by! dividing!the!number!of!new!nonQbank!enter!the!loan!membership!with!the!total!number! of!syndicated!loan!after!amendment!multiplied!by!100.! ! !"#$%&'#! !"1 = ! !"#$%&!!"!!"#!!"! − !"#$!!"#!$!!ℎ!!!"#$ !"#$%!!"#$%&!!"!!"#$%&'(#!!"#$!!"#$"%!!"#$%!!"#$%"#$%!!×!100! !
The! participant! of! syndicated! loan! is! not! provided! in! renegotiation! file.! Therefore,! to! measure! the! number! of! member! it! has! to! be! calculated! manually! by! matching! syndicated!loan!id!from!participant!file!with!renegotiation!file.! ! Knowing!the!component!of!fundamental!model,!the!study!eventually!use!the!following! model!for!regression!test! Model(1( ! = !! + !!"# + !!!!!!!!!!!!!!!! = !! + !!"# + !!!!!!!!!!!!!!!! = !! + !!"# + !!! ! Model!1!is!designed!based!on!the!discussion!in!the!literature!study!that,!when!there!is! changes! in! ownership! it! will! impacts! the! loan! covenant! through! renegotiations.!
Therefore,! renegotiation! terms! will! be! the! dependent! variable! and! turnover! will! be! independent! variable.! The! model! expects! that! if!! !is! positive,! when! the! turnover! increase!there!will!be!an!increase!in!the!renegotiation!terms.!
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Additionally,!as!discussed!in!the!previous!chapter!that!covenant!structure!is!determined! based!on!the!borrowers’!and!lenders’!characteristics.!Therefore,!to!check!the!validity!of! the! result,! control! variables! are! introduced! in! model.! 2! main! control! variables! are! borrowers’! quality! and! presence! of! nonQbank! in! the! syndicated! loan! membership.! In! measuring!borrower’s!quality!(BQ)!10!indicators!are!used,!Return!on!Asset!(ROA),!Debt! Equity!Ratio!(DE),!Interest!Coverage!Ratio!(ICR),!Current!Ratio!(CR),!Income!Growth!(IG),! Cash! holding! (C),! Book! to! Market! Ratio! (BMV),! Market! Capitalization! (MC),! and! Credit! Rating!(R),!and!Total!Book!Asset!(TBA).!!Specific!for!Credit!Rating,!dummy!variable!is!used! since!the!format!of!the!data!is!string,!where!0!indicate!Investment!Grade!(AAA+,!AAAQ,! AAA,! AA+,! AAQ,! AA,! A+,! AQ,! A,! BBB+,! BBBQ,! BBB)! and! 1! indicate! nonQinvestment! grade! (BB+,! BBQ,! BB,! B+,! BQ,! B,! CCC+,! CCCQ,! CCC,! CC+,! CCQ,! CC,! C+,! CQ,! C,! D,! SD).! The! detail! description!of!each!indicator!is!provided!in!Appendix!1.!
!
Based! on! Model! 1,! each! borrower’s! quality! indicator! will! be! added! to! the! model! and! tested!as!shown!in!the!model!below!
!
Model(2(@(10(
!"#"$%&'(&'%#!!"#$% = !! + !!!!" + !!!" + !!!!!!! !
These! models! will! be! used! to! test! data! pattern! if! all! indicators! show! similar! result! direction,! the! main! analysis! is! done! by! combining! several! control! variables! into! one! model.!The!selections!of!control!variables!to!combine!are!depending!on!the!collinearity! between!control!variables!and!robustness!of!the!result!from!Model!2Q!10.!2!models!are! tested! with! different! combination! of! control! variables.! The! models! that! is! used! for! testing!are!as!follows!
Model(11(&(12(
!"#"$%&'&(%#!!"#$% = !! + ! !!!" + !!!"!+ !!!"!+ ⋯ + ! !!!"!+ !!!! !
In! Model! 11! all! the! renegotiation! terms! will! be! regressed! with! the! combined! control! variable! ROA,! Rating,! Debt! Equity,! Book! Market! Value,! and! Total! Book! Assets.! For! Model! 12! each! renegotiation!will!be!regressed!with!different!control!variable.!Loan!principal!will!be!regressed! with! ROA,! Rating,! Debt! Equity,! Current! Ratio,! Cash,! and! Book! Market! Value.! Duration! will! be! regressed!with!ROA,!Rating,!Interest!Coverage!Ratio,!Debt!Equity,!Current!Ratio!and!Book!Market! Value.! Interest! Rate! will! be! regressed! with! ROA,! Rating,! Interest! Coverage! Ratio,! Debt! Equity,! Current!Ratio,!Cash,!and!Book!Market!Value!
!
Presence! of! nonQbank! as! control! variable! will! be! tested! to! assess! the! effect! of! less! informed! institutions.! As! suggested! in! the! previous! chapter! that! when! there! is! less! informed!parties!the!covenants!will!be!more!restrictive!therefore,!the!presence!of!nonQ banks!is!believed!to!have!impacts!on!renegotiations!terms.!The!analysis!that!will!be!done! with!different!approach,!as!explained!before!that!the!turnover!that!is!measured!will!be! calculated! differently.! The! model! for! analysis! will! employ! dummy! variable! to! indicate! which!contracts!has!nonQbanks!institution!in!the!membership.!1!implies!the!membership! with! no! nonQbanks! institutions! and! 0! implies! the! presence! of! nonQbanks! institutions! within!the!membership.!To!expand!understanding!on!the!relationship!between!variable! in!the!models,!interaction!term!will!be!added!in!to!the!model.!An!interaction!is!added!by! multiplying! the! value! of! turnover! (TO1)! and! the! dummy! variable.! The! presence! of! an! interaction!will!indicate!the!effect!of!one!independent!variable!on!the!response!variable! is!different!at!different!value!of!other!independent!variable.!!!The!models!that!are!tested! are!shown!below.!! ! Model(13!!!!!!!( !"#"$%&'(&'%#!!"#$% = !! + !!!!"1 + !!!" + !!!"×!"1! + !!!!!!! ! ! !
4. Data(
(In!this!research,!dataset!of!individual!loan!that!are!assembled!and!matched!with!other! database! are! used.! Unlike! most! research! on! syndicated! loan! where! the! source! mainly! obtained!from!Dealscan,!the!main!data!source!for!the!original!loan,!amended!loan,!and! syndicated!participants!is!Thomson!One.!To!assess!the!borrowers’!quality,!the!source!of! database!is!WDRS!Compustat.!!
!
There!are!5017!individual!US!Private!Loan!datasets!between!1996!and!2015!taken!from! ThomsonOn.! It! contains! origination! date,! amendment! date,! borrowers! id,! tranche! id! before! and! after! amendment,! loan! principal! value! before! and! after! amendment,! duration! value! before! and! after! amendment,! and! markup! rate! before! and! after! amendment.!For!syndication!participants,!there!are!5092!institutions!that!participate!in! 17967!individual!syndicated!loans!between!1983!and!2016.!By!combining!both!dataset! and!eliminating!incomplete!loan!information,!eventually,!1854!loan!dataset!are!used!for! loan!principal!analysis,!1767!loan!dataset!for!loan!duration,!and!1604!loan!dataset!for! markup!rate.!Limited!numbers!of!study!provide!detail!informative!syndicate!membership! compositions.!These!datasets!provide!distinct!syndicated!loan!data!since!it!allows!data! users! to! get! detail! information! of! the! loan! especially! syndicated! participant! arrays! on! renegotiation!time.!!
!
Table! 1! summarize! descriptive! statistic! of! renegotiation! terms.! As! can! be! seen! in! the! table!that!on!averages!between!1996!and!2015!the!loan!principal!increased!0.8!million,! duration! decrease! 0.45! year,! and! markup! increase! 8! bps! after! the! original! loan! renegotiated.! Looking! to! the! maximum! and! minimum! value! it! shows! that! all! the! renegotiation!terms!have!quite!big!dispersion!dataset.!!
!
As! explained! before! that! dependent! value! are! measured! based! on! the! percentage! change!after!the!loan!renegotiated.!Table!2!provides!the!descriptive!statistics!for!each! dependent!variable.!It!shows!that!on!average!all!the!variable!have!positive!changes!after!
renegotiation.!Additionally,!It!clearly!shows!that!the!distributions!of!the!dataset!for!all! dependent! variables! are! positively! skew.! There! are! outliers! that! need! to! be! removed! during!analyzing!with!regression.!! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ! ( ( ! ! ! ! Syndicate!participants!are!measured!manually!by!comparing!the!number!of!participant! before! and! after! amendment.! Table! 3! provide! statistics! summary! of! participants’! dataset.!Table!3!shows!the!number!of!participant!for!each!syndicated!loan.!On!average! between!1996!and!2015!for!each!syndicated!loan!there!are!around!9!participants!and! the!number!of!participants!does!not!really!change!even!after!amendment.!Additionally,! under! ‘Ex! Post! Amendment! Member’! it! provides! more! depth! view! on! the! dynamic! of! syndicated! membership! after! amendment.! As! can! be! seen! after! renegotiation! on!
Statistic(
Original( Amendment(
Principal!
(Million)! Duration!(Years)! Markup!(bps)! Principal!(Million)! Duration!(Years)! Markup!(bps)!
Mean! 488.17! 4.51! 180.62! 488.98! 4.07! 189.00!
Median! 250! 5! 175! 250! 4.86! 175!
Max!! 13,000! 27.39! 825! 12,500! 27.39! 1,200!
Min! 2.6! 0.13! 10! 2.5! 0! 10!
Statistic( Principal( Duration( Interest(
Mean! 25.76%! 5.52%! 19.80%! Median! 0.00%! Q0.20%! 0.00%! Max!! 2,204.00%! 4,538.46%! 1,993.02%! Min! Q98.33%! Q100.00%! Q84.00%! Table(1:(Renegotiation(Terms(Summary(Statistics( This!table!provides!descriptive!statistics!of!loan!covenant!between! 1996!and!2015!based!on!1854!sample!loan!principal,!1767!sample! on!duration,!and!1604!sample!on!interest.!! Table(2:(Change(Renegotiation(Terms(Summary(Statistics(
This! table! provides! descriptive! statistics! of! dependent! variable! after! renegotiation! between! 1996! and! 2015! based! on! 1854! sample! loan! principal,! 1767! sample! on! duration,! and! 1604! sample!on!interest.!!
average,!each!syndicated!loan!contract!has!5!participants!remain!in!the!membership!and! 3!leave!the!membership!with!3!new!participants!enter!the!membership!and!most!of!the! new!members!are!banks.!! ! ( ( ( ( !
Knowing! the! details! of! participants! allow! this! study! to! measure! the! membership! turnover.! As! explained! in! methodologies,! there! are! 2! different! turnovers! for! different! purpose! of! study.! From! 1854! sample! individual! syndicated! loan,! there! are! 1245! syndicated!loan!that!have!members!leaving!the!original!syndicated!membership!(TO)!and! 266!syndicated!loan!with!nonQbank!enter!syndicate!membership!(TO1)!during!the!period! of!1996!to!2015.!The!average!turnover!(TO)!of!loan!membership!in!that!period!is!41.79%! for!loans!that!has!leaving!participants!and!on!average!excluding!1996!between!1997!and! 2015!the!average!turnover!per!loan!is!about!0.82%.!For!TO1!the!average!new!member! enters!syndicate!membership!is!around!20%!with!average!turnover!per!loan!2.1%.!The! annual! turnover! trend! is! shown! in! Table! 4.! ! As! shown! in! the! Table! 4,! annually! the! turnover!membership!rate!is!above!30%!and!average!turnover!per!loan!is!mostly!below! 1%!for!loans!with!leaving!participants!with!the!number!of!contracts!is!very!fluctuating.! Different! with! turnover! (TO),! turnover! (TO1)! shows! fluctuate! annual! pattern! for! the! mean,!number!of!loans,!and!average!turnover!per!loan.! ! ! ! Table(3:(Loan(Syndicate(Participants(Summary(Statistics( This!table!provides!2!descriptive!statistics.!First!is!loan!syndicate!participant!before!and!after!renegotiation.! Second! is! detail! descriptive! statistics! after! renegotiation.! The! descriptive! statistics! provide! data! on! period! 1996!and!2015!based!on!1855!sample!of!individual!syndicate!loan.!
Bank Non'Bank Total Bank Non'Bank Total Bank+ Non'Bank Total
Mean 8.45 0.56 9.01 8.49 0.69 9.18 5.93 3.07 2.82 0.43 3.25
Median 7 0 7 7 0 8 5.00 1.00 1.00 0.00 2.00
Max3 29 19 30 29 19 29 26.00 25.00 23.00 18.00 24.00
Min 0 0 1 0 0 1 0.00 0.00 0.00 0.00 0.00
Remain3Member Member3Leave New3Member Ex#Post#Amendment#Member
Loan#Syndicate#Participants Statistics Original Amendment
! ! ! ! ! 10!indicators!are!used!for!control!variable!in!borrowers’!quality.!The!datasets!are!taken! from! WRDS! inside! Compustat! Capital! IQ! North! America! Fundamentals! Annual.! The! dataset! from! Compustat! are! matched! using! gv_key_id! according! to! the! amendment! fiscal! year! from! individual! loan! data.! Table! 5! provides! descriptive! statistics! of! the! indicators.! As! shown! in! the! table! that! each! indicators! has! different! number! of! sample! since!the!there!are!some!data!in!certain!years!are!not!available!in!Compustat!for!some!of! the! individual! loan! contract.! In! general,! the! table! shows! that! the! companies! for! this! research!are!dominated!by!small!and!medium!company,!since!the!market!capitalization! and!total!book!asset!are!slightly!above!the!median!of!the!dataset.!Besides,!even!though!
!! Turnover((TO)(
! Turnover((TO1)(
Year! Mean! Contracts!#!Loan! Average/loan! ! Mean! Contracts!#!Loan! Average/loan!
1996! 29.27%! 3! 9.76%! ! 7.14%! 3! 2.38%! 1997! 40.17%! 51! 0.79%! ! 11.49%! 19! 0.60%! 1998! 41.92%! 50! 0.84%! ! 27.31%! 21! 1.30%! 1999! 45.10%! 85! 0.53%! ! 27.05%! 21! 1.29%! 2000! 34.20%! 47! 0.73%! ! 20.60%! 24! 0.86%! 2001! 47.61%! 59! 0.81%! ! 22.56%! 17! 1.33%! 2002! 48.42%! 72! 0.67%! ! 27.77%! 18! 1.54%! 2003! 53.26%! 71! 0.75%! ! 36.10%! 25! 1.44%! 2004! 42.80%! 75! 0.57%! ! 22.64%! 20! 1.13%! 2005! 41.56%! 87! 0.48%! ! 30.31%! 15! 2.02%! 2006! 37.15%! 76! 0.49%! ! 15.48%! 14! 1.11%! 2007! 47.80%! 45! 1.06%! ! 8.66%! 12! 0.72%! 2008! 44.12%! 77! 0.57%! ! 30.84%! 9! 3.43%! 2009! 47.84%! 47! 1.02%! ! 24.35%! 8! 3.04%! 2010! 48.48%! 23! 2.11%! ! 12.50%! 2! 6.25%! 2011! 32.69%! 31! 1.05%! ! 21.96%! 5! 4.39%! 2012! 33.56%! 60! 0.56%! ! 14.83%! 9! 1.65%! 2013! 34.92%! 37! 0.94%! ! 17.31%! 7! 2.47%! 2014! 37.33%! 80! 0.47%! ! 12.75%! 14! 0.91%! 2015! 32.39%! 30! 1.08%! !! 11.67%! 3! 3.89%! Table(4:(Annual(Loan(Turnover((
This! table! provides! annual! turnover,! number! of! syndicate! loan! contract,! and! average! turnover! per! loan! that! has! leaving! participants! in! period! 1996! to! 2015! based! on! 1855! sample!of!individual!syndicate!loan.!
most!borrowers!have!zero!ROA!and!negative!income!growth,!most!of!the!companies!are! performed!well!with!ability!to!pay!interest,!manage!to!have!low!current!liabilities!and! limit!the!cash!amount.!! ! ! ( ( There!are!some!limitations!with!borrowers’!quality.!First,!some!indicators!do!not!have! the!data!correspond!to!the!fiscal!year!of!amended!loan.!To!overcome!this!limitation!the! loan!that!does!not!have!indicators!data!use!indicators!that!are!available!1!to!5!years!back! or!1!year!ahead.!Second,!since!the!number!of!data!available!in!period!1996!to!2015!are! varies,!each!indicators!has!different!size!of!available!data!as!can!be!seen!in!the!column!N.! This!limitation!will!create!a!bias!in!the!analysis!result!since!the!size!of!the!observations! will!get!smaller.! ! ! ! ! ! ! !
! ROA( ! Mean(0.00! Median(0.03! Max(1.52! Q4.20!Min( 1,667!N(
Debt(Equity( 1.57! 0.84! 212.94! Q387.59! 1,670! Interest(Coverage( 9.62! 3.47! 1,569.28! Q22.75! 1,656! Current(Ratio( 1.69! 1.50! 9.98! 0.08! 1,608! Income(Growth( Q0.29! 0.01! 112.59! Q171.15! 1,145! Cash( 320.19! 42.17! 24,123.00! 0.00! 1,665! Book(Market( 3.78! 0.48! 9103.78! Q946.25! 1,653! Market(Cap( 4,984.23! 1,075.63! 214,031.84! 0.01! 1,664! Total(Book(Asset( 6,095.39! 1,636.92! 230,461.00! 37.21! 1,670! Rating( Investment!Grade! Q! Q! Q! Q! 467! NonBInvestment!Grade! Q! Q! Q! Q! 870! Table(5:(Borrowers(Quality(Control(Variable((
This! table! provides! characteristics! of! syndicated! loan! borrowers! in! period! 1996! to! 2015! based! on! 1855! sample!of!individual!syndicate!loan.!
5. Empirical(Research((
(This!empirical!analysis!focuses!on!3!dependent!variables!on!the!change!of!renegotiation! terms! based! on! individual! syndicate! loan! in! period! 1996! to! 2015.! This! research! uses! linear! regression! technique! in! analyzing! the! effect! of! membership! turnover! on! the! change!of!renegotiation!terms,!with!membership!turnover!as!the!independent!variable! and!renegotiation!terms!as!dependent!variable.!As!discussed!in!the!literature!review!that! change! in! ownership! impact! the! renegotiation! terms! on! the! syndicated! loan.! 1855! individual!loan!dataset!matched!and!regressed!with!corresponding!control!variables!and! turnover!rate,!it!results!that!membership!turnover!has!positive!effect!on!renegotiation! terms.!Besides,!the!result!of!analysis!on!presence!of!nonQbank!in!the!membership!also! shows! positive! result! to! renegotiation! terms.! The! results! of! analysis! are! shown! under! Appendix!2!in!Table!7,!Table!8,!and!Table!9!for!loan!principal,!loan!duration,!and!markup! rate,!respectively.!! ! Table!7!presents!the!estimated!coefficients!of!turnover!and!control!variables!regressed! with!loan!principal.!As!can!be!seen!in!the!table!that!all!turnover!coefficients!estimates! are!positively!affect!loan!principal.!This!means!that!when!the!number!of!people!leaving! the! syndicate! membership! increases! there! is! an! increase! in! loan! principal.! The! magnitude!effect!depends!on!the!coefficient!of!estimates.!For!example!Model!11!that! has!highest!adjusted!R!square,!when!there!is!changes!in!turnover!from!0!to!100%!and! holding!other!control!variables!constant!the!loan!principal!will!increase!for!about!32.5%! from! the! original! principal! amount.! The! increase! of! 32.5%! is! above! the! average! of! increase!in!loan!amount!from!the!data!sample!as!shown!in!Table!2,!where!the!mean!of! data!sample!is!25.67%.!Besides,!on!average!the!amount!of!original!loan!principal!on!the! data!set!is!around!$488.17!Million,!this!will!result!to!an!increase!of!$158.66!Million.!This! finding!indicates!that!the!changes!in!turnover,!or!the!more!member!leave!the!original! syndicate!membership,!the!borrower!get!more!benefit!from!it!since!there!is!the!increase! of!additional!funds!to!flow!to!the!loan!contract.!!!
Similar!result!also!shown!in!the!Model!13!that!analyzes!the!effect!of!nonQbank!in!new! syndicated!member!after!renegotiation.!As!shown!in!Table!7!that!the!more!number!of! nonQbank!institution!enter!to!syndicate!membership!the!higher!the!loan!principal.!The! coefficient!shows!quite!higher!effects!of!the!nonQbank!enter!to!the!membership!and!the! model!has!quite!high!explanatory!factor!by!looking!to!the!adjusted!R!square.!With!the! inclusion!of!interaction,!this!result!indicate!that!when!the!initial!membership!has!no!nonQ bank!institution!and!additional!nonQbank!enter!the!membership,!the!loan!principal!will! increase!at!lower!rate!compare!to!the!situation!where!the!initial!membership!has!nonQ bank!institution!and!additional!nonQbank!enter!the!membership.!! ! The!magnitude!effect!shows!more!clear!interpretation!of!the!result.!As!can!be!seen!from! Table!7!that!for!membership!that!has!nonQbank!from!the!beginning,!FI!=!0,!the!effect!of! increase!in!nonQbank!member!from!0%!to!100%!will!be!49.8%+[(12.228)%*0]=49.8%.!For! membership!that!has!no!nonQbank,!FI!=!1,!the!effect!of!an!increase!in!nonQbank!member! from! 0%! to! 100%! will! be! 49.8%+[(12.228)%*1]=37.57%.! This! result! is! slightly! higher! compare! to! coefficient! with! borrowers! quality! as! control! variable! with! the! range! of! increase!is!between!$183.41!Million!and!$243.11!Million!when!the!initial!membership! has!and!does!not!have!nonQbank!members.!This!implies!that!the!borrower!will!get!more! benefit!when!there!are!more!nonQbanks!in!the!syndicate!membership.!
!
Table! 8! shows! estimated! coefficients! of! turnover! and! control! variable! regressed! with! loan!duration.!The!regression!processes!are!the!same!with!loan!principal!but!it!differs!in! Model! 12.! As! explained! in! the! methodology! that! the! regression! with! combine! control! variables! are! done! based! on! the! collinearity! of! data! between! control! variables.! For! income! growth,! this! control! variable! is! not! included! since! the! data! will! reduce! the! number!of!observations.!The!regression!result!in!Table!8!shows!similar!result!direction!of! estimate!with!loan!principal!estimate.!Turnover!coefficient!has!positive!correlation!with! changes! in! loan! duration.! The! result! means! that! when! the! turnovers! of! syndicate! membership!increase,!it!will!increase!the!duration!of!the!loan.!The!magnitude!effect!of!
turnover!on!loan!duration!is!lower!compare!to!the!magnitude!effect!of!turnover!on!loan! principal.! An! example! from! the! highest! adjusted! R! square! where! Model! 12! that! independent! variable! explains! almost! 4%! of! independent! variable.! It! shows! that! the! coefficient!is!0.176,!which!indicate!that!the!change!of!turnover!from!0!to!100%!holding! control!variables!constant!will!result!to!change!of!17.6%!on!loan!duration!from!original! loan.!The!increase!of!17.6%!is!three!times!the!average!of!increase!in!duration!from!the! data!sample!as!shown!in!Table!2,!where!the!mean!of!data!sample!is!5.52%.!Besides,!on! average!the!amount!of!original!loan!principal!on!the!data!set!is!around!4.51!years,!this! will!result!to!an!increase!of!0.79!years.!This!finding!indicates!that!the!changes!in!turnover! or! the! more! members! leave! the! original! syndicate! membership,! the! borrowers! get! benefit! from! the! high! turnover! on! syndicate! membership,! where! they! can! have! more! loan! principal! and! longer! loan! maturity.! Similar! with! loan! principal,! when! the! initial! membership!has!no!nonQbank!institution!and!nonQbank!enter!the!membership,!the!loan! principal! will! increase! at! lower! rate! compare! to! the! situation! where! the! initial! membership!has!nonQbank!institution!and!additional!nonQbank!enter!the!membership! !
Align!with!the!result!from!the!loan!principal,!Model!13!that!analyze!effect!of!nonQbank! membership!on!loan!duration!also!shows!positive!direction!of!the!variables.!As!can!be! seen! from! Table! 8! that! the! more! the! nonQbank! enter! the! syndicate! membership! the! longer!the!duration.!It!shows!quite!high!explanatory!factor!with!high!coefficient!compare! to!Model!11!and!12.!Because!of!the!interaction,!the!effect!of!having!more!new!nonQbank! member!is!different!if!the!initial!membership!has!nonQbank!or!has!no!nonQbank!member! in! the! initial! membership.! For! duration,! the! loan! duration! will! increase! at! higher! rate! when!initial!membership!has!nonQbank!compare!to!the!initial!membership!that!has!no! nonQbank!institution.!This!shows!that!the!more!uninformed!member!in!the!membership,! the!loan!covenant!will!be!stricter,!which!is!disadvantage!for!the!borrowers.!
!
From! Table! 8,! the! magnitude! effect! can! be! measured.! As! shown! in! Table! 8! that! for! membership!that!has!nonQbank!from!the!beginning,!FI!=!0,!the!effect!of!increase!in!nonQ
bank!member!from!0%!to!100%!will!be!50.3%+[5.719%*0]=50.3%.!For!membership!that! has!no!nonQbank,!FI!=!1,!the!effect!of!an!increase!in!nonQbank!member!from!0%!to!100%! will! be! 50.3%+[5.719%*1]=56.02%.! The! magnitude! effect! is! far! higher! compare! to! the! coefficient! from! borrowers’! quality! control! variables.! The! increase! of! duration! due! to! new!nonQbank!in!the!membership!is!between!2.27!years!and!2.52!years!depending!on! the!initial!membership!structure.!It!is!clear!that!when!the!nonQbank!members!enter!and! the!initial!membership!has!nonQbank,!the!increase!is!shorter!with!the!difference!about! 0.23!year.!! ! Table!9!provides!regression!result!of!turnover!and!control!variables!on!markup!rate.!The! analysis! has! similar! approach! with! other! dependent! variables! and! differs! in! Model! 12.! The!turnover’s!coefficient!estimations!are!positively!correlated!with!markup!rate,!similar! with!loan!principal!and!loan!duration.!The!coefficient!estimation!on!Table!9!shows!quite! robust!result!of!turnover!effect!on!markup!rate,!since!the!coefficients!of!estimations!are! very! significant.! This! result! means! that! markup! rate! will! increase! when! the! turnover! increase.!The!magnitude!effect!of!the!coefficient!is!higher!compare!to!the!duration!but! lower!than!loan!principal!amount.!As!can!be!seen!from!Table!9!that!an!increase!of!nonQ bank!in!membership!from!0%!to!100%!will!increase!the!interest!rate!for!about!21%.!The! increase!of!interest!rate!is!close!to!the!average!of!data!sample,!which!is!19%.!With!the! markups! average! of! 180.62! bps! from! data! sample,! the! increase! in! the! nonQbank! members! will! increase! interest! markup! for! about! 38! bps.! Moreover,! in! Model! 12! it! shows! quite! strong! explanation! factors! to! the! dependent! variable.! This! finding! implies! that!increase!in!turnover!is!a!disadvantage!for!the!borrowers!since!the!loan!will!be!more! expensive.!!
!
Model! 13! that! assess! the! effect! of! nonQbank! turnover! on! markup! rate! shows! positive! result.! The! effect! is! similar! with! loan! principal! which! indicate! that! when! the! initial! membership! has! no! nonQbank! institution! and! additional! nonQbank! enter! the! membership,! the! loan! principal! will! increase! at! lower! rate! compare! to! the! situation!
where! the! initial! membership! has! nonQbank! institution! and! additional! nonQbank! enter! the!membership.!!It!confirms!that!the!increase!in!uninformed!members!will!make!the! loan! covenant! stricter! since! the! markup! rate! will! be! higher! when! the! syndicate! membership! has! more! uninformed! members.! This! can! be! seen! from! the! magnitude! effect!that!when!nonQbank!enters!and!the!initial!membership!has!no!nonQbank!member! the!markup!rate!is!42.1%+[(10.765)%*1]=31.34%!which!is!10.765%!lower!or!19.44!bps! compare!to!the!effect!when!nonQbank!enters!and!the!initial!membership!has!nonQbank! member.!! ! All!the!result!for!each!renegotiation!terms!shows!quite!robust!result.!The!result!shows! supportive! explanatory! factors! in! the! control! variables! on! borrowers’! quality! and! presence! of! nonQbank! institution.! While! holding! the! control! variable! constant! all! the! model! result! to! the! positive! direction! of! independent! variable! toward! the! dependent! variable.! Changes! in! the! loan! ownership! result! to! an! increase! in! the! loan! amount! to! borrowers!with!longer!duration!but!it!costs!more!for!borrowers.!Effects!of!the!turnovers! on!renegotiation!terms!are!different!based!on!the!presence!of!nonQbank!in!syndicated! membership.!As!explained!above,!loan!duration!will!have!lower!increase!when!syndicate! memberships!have!additional!nonQbank!members!compare!to!the!syndicate!membership! with! no! additional! nonQbank! members,! while! loan! principal! and! markup! rate! will! be! higher!when!syndicate!membership!has!additional!nonQbank!members!compare!to!the! syndicate!membership!with!no!additional!nonQbank!members!
!
These! findings! point! out! that! the! change! in! turnover! will! benefit! both! borrowers! and! lenders.!From!borrowers!perspective!this!means!that!there!will!be!more!flow!of!capital! for! them! with! longer! duration! but! they! have! to! accept! the! higher! price! of! the! funds.! Theories!suggest!that!when!the!ownership!changes,!the!loan!covenant!will!be!stricter.! However,! this! empirical! research! shown! by! borrowers’! quality! analysis! does! directly! show! the! effect! suggested! by! theories,! since! the! loan! principal! and! loan! duration! are! getting!higher!when!the!ownership!change.!The!increase!of!markup!rate!possibly!due!to!
the!increase!in!loan!principal!and!duration!that!cause!the!loan!gets!more!expensive.!On! the!other!hand,!the!result!from!analysis!on!uninformed!members!indicate!that!turnover! create! information! asymmetry! about! the! borrowers.! The! turnover,! may! benefit! the! borrowers! but! the! benefit! decreases! when! syndicate! membership! has! additional! uninformed!member!during!renegotiation.!!
6. Conclusion(
!
This! research! analyze! syndicated! loan! membership! turnover! on! the! change! in! renegotiation!terms!based!on!1855!dataset!of!individual!syndicated!loan!for!period!1996! to!2015!in!the!US!loan!private!credit!market.!The!analysis!was!performed!using!linear! regression! analysis! with! membership! turnover! as! independent! variable,! and! change! in! loan! principal,! duration,! and! markup! rate! as! dependent! variable.! 2! main! Control! variables,! borrowers’! quality! and! presence! of! nonQbank! (uninformed! member)! in! syndicated!membership!are!introduced!in!the!regression!to!get!the!validity!of!true!effect! on!independent!variable.!!
!
Based!on!the!literature!study,!it!shows!that!renegotiation!is!a!tool!to!monitor!the!firm! and! approach! to! reduce! informational! asymmetry! when! there! is! a! change! of! loan! ownership.!It!is!an!inevitable!process!when!syndicated!ownership!changes!and!it!impacts! the! covenant! according! to! the! membership! structure.! ! Many! empirical! studies! have! proven!that!covenants!tend!to!be!more!restrictive!after!renegotiation!due!to!additional! contingent! factor! from! borrowers! side.! Additionally,! supporting! argument! shows! that! borrower!and!lenders!characteristics!affect!the!structure!of!loan!covenants.!!
!
It!is!clear!that!changes!in!the!ownership!result!to!adjusted!covenants,!but!it!is!not!known! how! big! is! the! impact! the! changes! on! covenant! adjustment.! Besides,! it! explains! that! loans!are!sold!when!the!lenders!know!the!performance!of!the!borrowers.!This!is!similar! to! the! incentive! of! renegotiation! where! it! depends! on! the! borrowers! conditions.! This! empirical! research! explores! how! changes! in! ownership! impact! the! covenants! with!
borrowers! performance! and! member’s! characteristics! are! controlled! in! the! regression! analysis.!Loan!principal,!duration,!and!markup!rate!are!regressed!with!turnover!together! with!control!variable!from!10!indicators!of!borrower’s!quality!and!the!presence!of!nonQ banks!institution.!!! ! In!this!research!there!is!limitation!on!the!data!and!the!approach.!As!discussed!in!the!data! section!that!initially!there!are!5017!individual!data!but!eventually!the!data!that!is!used! reduced! due! to! missing! information! from! the! database! which! reduce! the! observation! number.! Additionally,! some! of! the! data! that! is! used! as! control! variable! are! not! correspond!to!the!fiscal!year!of!the!loan!amendment!due!to!unavailable!data!from!the! database.!Therefore,!the!data!are!replaced!with!the!past!data!between!1!to!5!years!back! of!the!amendment!fiscal!year!or!1!year!ahead!of!amendment.!Besides,!for!the!turnover,! in!measuring!the!number!of!members!for!each!individual!loan!are!calculated!manually.!! There!is!potential!human!error!in!calculating!the!number!of!member!for!each!individual! loan.!! ! Moreover,!the!methodology!that!is!used!is!designed!in!order!to!simplify!the!result,!so!it! can! be! interpreted! and! measured! easily.! Other! possible! approached! is! measuring! the! change! of! the! renegotiation! terms! by! looking! to! the! difference! between! amendment! values! of! the! terms! with! the! original! value! of! the! terms.! By! doing! that! approach! the! result!of!empirical!study!will!be!different,!there!are!more!outliers!so!the!observations! have! to! be! reduced,! the! result! will! be! more! difficult! to! be! interpreted! between! renegotiation!terms!since!the!unit!are!different.!! ! The!analysis’!results!show!that!increase!in!turnover!or!the!more!members!leaving!the! original!syndicated!membership!the!higher!the!loan!principal!the!borrowers!will!receive,! longer!duration!of!loan,!but!they!have!to!pay!more!due!to!increase!in!the!markup!rate.!! This!result!from!borrower’s!quality!analysis!slightly!misses!the!theory!on!duration!that! when! the! agency! problem! exacerbate! it! should! have! shorter! duration.! On! the! other!
hand,!it!is!true!that!the!restrictive!covenant!appears!in!the!rise!of!the!markup!rate!when! there!is!change!in!the!ownership!during!renegotiation.!But!the!increase!in!the!markup! rates!possibly!an!extra!cost!due!to!increase!in!loan!principal!and!loan!duration.!Analysis! based! on! presence! of! nonQbank! control! variable! shows! that! the! increases! of! renegotiation! terms! are! different! according! to! the! level! of! additional! uninformed! member!in!the!syndicate!membership.!Empirical!result!shows!that!when!the!turnovers! increase,!loan!principal!amount!appears!to!have!bigger!change!compare!to!the!change!in! markup! rate! and! duration! by! looking! to! the! coefficient! of! estimates.! The! result! of! regression!also!shows!that!some!control!variables!improve!the!explanatory!factor!of!the! dependent!variable!and!it!maintains!the!constant!value!of!the!coefficient!estimate.!! !
To! sum! up,! this! study! finds! that! there! is! positive! effect! from! turnover! on! the! renegotiation!terms!in!respect!to!loan!principal,!duration,!and!markup!at!different!rate! depending!on!the!additional!of!uninformed!member.!This!result!shows!that!borrowers! and! lenders! get! benefit! from! the! increase! in! turnover,! where! borrowers! will! receive! more!funds!with!longer!duration!and!lenders!will!receive!more!interest!from!the!loan.!! ! ! ! ! ! ! ! ! ! ! ! ! !
References(
! Aghion,!P.,!Dewatripont,!M.,!&!Rey,!P.!(1994).!Renegotiation!Design!with!Unverifiable! Information.!Econometrica!,!257Q282.! ! Begley,!J.!(1994).!Restrictive!Covenants!Included!in!Public!Debt!Agreements:!An!Empirical! Investigation.!Unpublished!Manuscript,!University!of!Columbia!.! ! Berlin,!M.,!&!Loeys,!J.!(1988).!Bond!Covenants!and!Delegated!Monitorin!.!Journal!of! Finance!,!397Q412.! ! Boyd,!J.,!&!Prescott,!E.!(1986).!Financial!IntermediaryQCoalitions.!Journal!of!Economic! Theory!,!211Q32.! ! Bradley,!M.,!&!Roberts,!M.!R.!(2015).!The!structure!and!pricing!of!corporate!debt! covenants.!Quarterly!Journal!of!Finance!.! ! Champagne,!C.,!&!Kyzanowski,!L.!(2007).!Are!current!syndicated!loan!alliances!related!to! past!alliances?!.!Journal!of!Banking!&!Finance!,!3145Q3161.! ! Diamond,!D.!(1984).!Financial!Intermediation!and!Delegated!Monitoring.!Review!of! Economic!Studies!,!393Q414.! ! Diamond,!D.!(1991).!Monitoring!and!Reputation:!The!Choice!Between!Bank!Loans!and! Directly!Placed!Debt.!Journal!of!Political!Economy!,!689Q721.! ! Dichev,!I.,!&!Skinner,!D.!(2002).!LargeQSample!Evidence!on!the!Debt!Covenant! Hypothesis.!Journal!of!Accounting!Research!,!1091Q123.! ! Drucker,!S.,!&!Puri,!M.!(2009).!On!Loan!Sales,!Loan!Contracting,!and!Lending! Relationships!.!Oxford!University!PressBThe!Society!for!Financial!Studies!,!2835Q2872.! Fama,!E.!(1985).!What's!Different!about!Banks?!.!Journal!of!Monetary!Economics!,!10Q9.! ! Goyal,!V.!K.!(2005).!Market!discipline!of!bank!risk:!evidence!from!subordinated!debt! contracts.!Journal!of!Financial!Intermediaries!,!318Q350.! ! Harris,!M.,!&!Raviv,!A.!(1995).!The!Role!of!Games!in!Security!Design.!The!Review!of! Financial!Studies!,!327Q367.! ! Jones,!J.!D.,!Lang,!W.!W.,!&!Nigro,!P.!J.!(2005).!Agent!Bank!Behavior!In!Bank!Loan! Syndications.!The!Journal!of!Financial!Research!,!385Q402.! !Malitz,!I.!(1986).!On!Financial!Contracting:!The!Determinants!of!Bonds!Covenants.! Financial!Management!,!18Q25.! Maskin,!E.,!&!Moore,!J.!(1999).!Implementation!and!Renegotiation.!The!Review!of! Economic!Studies!,!39Q56.! ! Nash,!R.!C.,!Netter,!J.!M.,!&!Poulsen,!A.!B.!(2003).!Determinants!of!contractual!relations! between!shareholders!and!bondholders:!investment!opportunities!and!restrictive! covenants.!Journal!of!Corporate!Finance!,!201Q232.! ! Pennachi,!G.!G.!(1988).!Loan!sales!and!the!cost!of!bank!capital.!Journal!of!Finance!.! Rajan,!R.,!&!Winton,!A.!(1995).!Covenants!and!Collateral!as!Incentives!to!Monitor.! Journal!of!Finance!,!1113Q45.! ! Ramakrishnan,!R.,!&!Thakor,!A.!(1984).!Informaton!Reliability!and!a!Theory!of!Financial! intermedation.!Review!of!Economic!Studies!,!415Q32.! ! Robert,!M.!R.!(2015).!The!role!of!dynamic!renegotiation!and!asymmetric!information!in! financial!contracting!.!Journal!of!Financial!Economics!,!61Q81.! ! Roberts,!M.!R.,!&!Sufi,!A.!(2009).!Renegotiation!of!financial!contracts:!Evidence!from! private!credit!agreements!.!Journal!of!Financial!Economics!,!159Q184.! ! Simons,!K.!(1993).!Why!do!banks!syndicate!loans?!New!England!Economics!Review!of!the! Federal!Reserve!Bank!of!Boston!,!45Q52.! ! Smith,!C.!W.,!&!Warner,!J.!B.!(1979).!On!financial!contracting:!an!analysis!of!bond! covenants.!Journal!of!Financial!Economics!,!117Q161.! ! Smith,!C.,!&!Warner,!J.!(1979).!On!Financial!Contracting:!An!Analysis!of!Bond!Covenants.! Journal!of!Financial!Economics!,!117Q61.! ! Sufi,!A.!(2007).!Information!Asymmetry!and!Financing!Arrangements:!Evidence!from! Syndicated!Loans!.!Journal!of!Finance!,!629Q668.! ! Weidner,!D.!(2000,!January!10).!Syndicated!lending!closes!out!’90s!on!a!tear.!The! American!Banker!.! ! ! ! ! ! !
Appendices(
( Appendix(1:(Control(Variable(Descriptions( ( ( ( ( ( (Indicators( Equation( Compustat(Code(
Return!on!Asset! !"#!!"#$%& !"#$%!!""#$! !" !"! Debt!Equity!Ratio! (!"#$!!"#$!!"#$ + !ℎ!"#!!"#$!!"#$)!"##"$!!"#$%&!!"#$% ! (!"## + !"#)!"# ! Interest!Coverage!Ratio! !"#$%$&#!!"#!!"#$%"&!!"#$%&$!!"#$%!"#$ ! !"#$ !"#$! Current!Ratio! !"##$%&!!""#$!!"#$% !"##$%&!!"#$"%"&"'(!!"#$%! !"# !"#! Income!Growth! !"#!!"#$%&!"#!!"#$%&!
!!!− 1!
!"! !"!!!− 1!
Cash! !"#ℎ!!"!ℎ!"#! !"!
Book!to!Market!Ratio! (!""#!!"#$%!!"#!!ℎ!"#!×!!"##"$!!ℎ!"#!!"#$#%&'(&))!"#$%&!!"#$%!!"#$% ! (!"#$%&!×!!"#$) !"#$%& ! Market!Capitalization! !"#$%!!"#$%!!""#!$!!"#$%&!×!!"##"$!!ℎ!"#!!"#$#%&'(&)! !"##_!×!"#$!
Total!Book!Asset!! !"#$%!!""#$! !"!
Credit!Rating! !&!!!"#$%&'(!!"#$!!"#$!!""#$%!!"#$%&!!"#$%&! !"#$%&'(!
Table(6:(Borrowers’(Quality(Indicators(
This! table! provides! detail! measurements! approach! of! borrowers’! quality! indicator! and! variables! taken!from!Compustat.!
Appendix(2:(Empirical(Research’s(Result( ( ( ( ( ( ( ( ( ( ( ( ! Loan(Principal(
! Model!11! Model!12! Model!13!
TO( 0.325**! 0.312**! !! ( (2.193)! (2.20)! ! TO1( ! ! 0.498**! ( ! ! (2.22)! ROA( 0.671**! 0.591**! ! ( (2.23)! (2.15)! ! R( 0.200**! 0.200**! ! ( (2.12)! (2.31)! ! DE( Q0.009***! Q.009**! ! ( (Q2.63)! (Q2.32)! ! BMV( 0.141***! 0.002**! ! ( (2.79)! (1.97)! ! TBA( Q0.000*! ! ! ( (Q1.66)! ! ! CR( ! Q0.109**! ! ( ! (Q2.08)! ! C( ! Q0.000**! ! ( ! (Q1.97)! ! FI( ! ! Q12.228**! ( ! ! (Q2.32)! FI*TO1( ! ! 4.664***! ( ! ! (5.14)! N( 1127! 1104! 1608! adj(R@sq( 0.024! 0.019! 0.030! Table(7:(Turnover(Estimates(on(Loan(Principal(
This! table! provides! estimates! of! turnover! on! Loan! Principal! tested! using! regression! analysis! for! different! control! variables.! Column! 1! and! represent! turnover! estimates! tested! with! borrowers! quality!control!variables.!Column!3!represents!turnover!estimate!tested!with!presence!of!nonQbank! control! variable.! R! and! FI! are! using! dummy! variable! and! explained! in! the! Methodology.! The! regression! use! individual! syndicated! loan! data! from! period! 1996! to! 2015.! Robust! tQstatistics! are! reported!in!parentheses.!*,!**,!***!indicate!significance!at!10%,!5%,!and!1%,!respectively.!
( ( ( ( ( ( ( ( ( ( ( ( ! Duration(
! Model!11! Model!12! Model!13!
TO( 0.225**! 0.176***! !! ( (2.14)! (2.61)! ! TO1( ! ! 0.503***! ( ! ! (4.67)! ROA( 47.418**! 26.668**! ! ( (2.04)! (1.99)! ! R( 14.136**! 12.617***! ! ( (2.41)! (3.50)! ! DE( 2.361**! 1.327**! ! ( (2.35)! (2.14)! ! BMV( Q5.77*! 1.458**! ! ( (Q1.677)! (2.59)! ! TBA( 0.00**! ! ! ( (2.12)! ! ! ICR( ! 0.313**! ! ( ! (2.30)! ! CR( ! Q4.953**! ! ( ! (Q2.24)! ! FI( ! ! 5.719***! ( ! ! (3.01)! FI*TO1( ! ! 1.425**! ( ! ! (2.45)! N( 947! 972! 1409! adj(R@sq( 0.018! 0.037! 0.022! Table(8:(Turnover(Estimates(on(Duration((( This!table!provides!estimates!of!turnover!on!duration!tested!using!regression!analysis!for!different! control!variables.!Column!1!and!represent!turnover!estimates!tested!with!borrowers!quality!control! variables.! Column! 3! represents! turnover! estimate! tested! with! presence! of! nonQbank! control! variable.!R!and!FI!are!using!dummy!variable!and!explained!in!the!Methodology.!The!regression!use! individual! syndicated! loan! data! from! period! 1996! to! 2015.! Robust! tQstatistics! are! reported! in! parentheses.!*,!**,!***!indicate!significance!at!10%,!5%,!and!1%,!respectively.!
( ( (
! Markup(
! Model!11! Model!12! Model!13!
TO( 0.202**! 0.213**! !! ( (2.09)! (2.24)! ! TO1( ! ! 0.421**! ( ! ! (2.10)! ROA( Q106.940***! Q99.965***! ! ( (Q5.33)! (Q5.01)! ! R( Q22.671***! Q14.817***! ! ( (Q3.54)! (Q2.63)! ! DE( Q0.347**! Q0.371**! ! ( (Q2.06)! (Q2.42)! ! BMV( 2.416**! 2.874**! ! ( (2.08)! (2.011)! ! TBA( 0.000**! ! ! ( (Q1.98)! ! ! ICR( ! Q0.350**! ! ( ! (Q2.28)! ! CR( ! 7.837***! ! ( ! (2.66)! ! C( ! 0.007***! ! ( ! (3.03)! ! FI( ! ! Q10.765**! ( ! ! (Q2.40)! FI*TO1( ! ! 0.025**! ( ! ! (2.26)! N( 1009! 949! 1387! adj(R@sq( 0.040! 0.059! 0.015! Table(9:(Turnover(Estimates(on(Markup(((
This! table! provides! estimates! of! turnover! on! markup! tested! using! regression! analysis! for! different! control! variables.! Column! 1! and! represent! turnover! estimates! tested! with! borrowers! quality! control! variables.!Column!3!represents!turnover!estimate!tested!with!presence!of!nonQbank!control!variable.!R! and! FI! are! using! dummy! variable! and! explained! in! the! Methodology.! The! regression! use! individual! syndicated!loan!data!from!period!1996!to!2015.!Robust!tQstatistics!are!reported!in!parentheses.!*,!**,! ***!indicate!significance!at!10%,!5%,!and!1%,!respectively.!
