The Impact of Private Equity Sponsors on Syndicated Loans

Sponsored loans are issued with the assistance of private equity firms, which negotiate terms on behalf of the borrower. We analyze the impact of engaging private equity sponsors on the cost of syndicated loans and the value added by loan sponsors. We find that sponsorship is associated with complex transactions with syndicates, issues with greater degree of information asymmetry and issues without covenants and lower credit ratings. As such, the cost of the loans with sponsors is higher on the average than those without sponsors. Stock price reaction to syndicated loans is positive and significant, and it is more pronounced for sponsored syndicated loans. Although sponsored debts cost more than non-sponsored debts, the sponsors help to bring the debt issue to the market, which might not happen otherwise. By enabling high risk firms to raise capital, they contribute value that is recognized through positive stock price reaction. Introduction The purpose of this study is to examine the association between private equity sponsors and the cost of debt in a market that is relatively new, important and growing. Specifically, we examine the role that private equity sponsors play in influencing the cost of debt in the syndicated loan market. While there exists a significant body of research that examines the role of arrangers in the syndicated loan markets, for example, Sufi (2007), surprisingly little research examines the role of private equity sponsors in the syndicated loan market. Each year since 1999, U.S. firms have obtained over $1 trillion in new syndicated loans. The syndicated loan market began as a mechanism to service foreign sovereign debt, but it has evolved to become a primary source for corporate domestic capital (Yago and McCarthy 2004 and Bushman and Wittenberg-Moerman 2009). Weidner (2000) and Sufi (2007) report that syndicated lending represents more than fifty percent of corporate financing originated in the U.S. and that a significant number of the top 500 non-financial public firms rely on syndicated loan financing. One reason for the growth in loan syndication is because individual loans to borrowers have increased in size, therefore necessitating increased monitoring and risk sharing by lenders. Given the growing size and importance of the syndicated loan market, researchers have started to examine important issues associated with this innovation. For example, Dennis and Mullineaux (2000), Lee and Mullineaux (2004), Jones, et al. (2005), Ball, et al. (2008), Wittenberg-Moerman (2008) and Ivashina (2009) examine the role of various loan contract structures in this market in mitigating moral hazard and adverse selection agency issues. Studies such as Keys et al. (2009, 2010), Mian and Sufi (2009), Purnanandam (2011), Demyanyk and Van Hemert (2011) and Benmelech et al. (2012) examine lendersu0027 incentives associated with the securitization of loans. Ivashina and Kovner (2011) examine the impact of the sponsoru0027s bank relationship on the cost of loan and its covenant structure. Our objective is to investigate the impact of private equity sponsors on loan pricing and deal size for syndicated loans. (1) We study whether using a private equity sponsor provides benefits to borrowers. Private equity sponsors participate in syndicated loan transactions by providing critical and necessary information needed to complete the transaction. Private equity sponsors also may provide equity and other financial instruments to the borrower in exchange for partial or full control of the firm. (2) Unsponsored syndicated loan transactions are syndicated deals that are only brought to market by the arranger. Sponsored syndicated loan transactions are syndicated deals brought to the market by arrangers and private equity sponsors, which may reveal the role of the private equity sponsor in the syndicate loan market. Our study adds and contributes to the limited literature on sponsorship and syndicated loans. …