Rongbing Huang, Donghang Zhang, and Yijia Zhao
Relationship Banking and Loan Syndicate Structure: The Role of Private Equity Sponsors Coles Working Paper Series, FALL14-11, October 2014
According to Thomson Reuters, U. S. companies raised $2.3 trillion through syndicated bank loans in 2013. This is compared with $1.5 trillion that U.S. companies raised through corporate bonds during the same period. Therefore, it is highly important to understand how loan syndicates are structured to address information asymmetry problems in lending. Using a sample of syndicated bank loans to U.S. companies after their initial public offerings (IPOs), we examine how private-equity (PE) sponsors’ relationships with banks influence their portfolio companies’ loan syndicate structure. We find that a stronger lending relationship between the borrower’s PE sponsor and its lead bank enables the bank to retain a significantly smaller share of the loan and form a larger and less concentrated syndicate. A stronger sponsor- bank relationship also attracts foreign bank participation. The relationship banking literature suggests that a bank’s relationship with a borrower can facilitate the bank’s information acquisition about the borrower. Our findings suggest that the bank’s relationship with a third-party financial sponsor of the borrower also mitigates information asymmetry problems in lending.
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