1. Institutional Investors and Loan Dynamics: Evidence from Loan Renegotiations
Mehdi Beyhaghi, Ca Nguyen, John Wald
University of Texas - San Antonio
American Finance Association 2018
PhD Student Poster Session

2. Overview
The new regulations in the US and Worldwide puts tougher restrictions on banks’ credit extension both in terms of involvement in loan origination and in loan securitization.
Taking into the account the rise in demand for credit after the crisis, it means that nonbank institutions’ participation is expected to rise at a faster pace.
About one quarter of all US loan commitments in 2016 were made by nonbanks. (report by Shared National Credit program)
Our goal is to study how the participation of nonbank institutions affects the loan renegotiation process and renegotiation results.

3. Participation of Nonbanks in Lending Syndicates
Bank Bank Bank Mutual Fund Insurance Hedge Fund
Company
Loan Arranger $
Borrower

4. Types of Nonbank Lenders
We consider the following types of nonbank investors:
Finance companies
Investment banks
Hedge fund/private equity funds
Open-end mutual funds
Closed-end funds
Insurance companies
Collateralized loan obligations
Other

5. Contributions
Extend the literature on the role of lenders in corporate finance and on the disciplining role of debt.
Provide new insights on how nonbank lenders differ from bank lenders in the context of loan renegotiation.
Results:
Nonbank lenders, particularly CLOs, closed-end funds, open-end mutual funds, and hedge funds, are more likely to exit the syndicate rather than engaging in the renegotiated loan.
Addition of nonbank lenders into a syndicate implies higher cost of debt.
Addition of bank lenders is associated with tighter covenants.
Potential interpretations:
Funding liquidity risk
Less diversified loan portfolio
Less adept in information processing and monitoring

6. Why Loan Ownership Structure Matters?
Loan pricing (Ivashina, 2009; Ivashina and Sun, 2011a; Nadauld and Weisbach, 2012; Lim, Minton and Weisbach, 2014)
Cost of financial distress and bankruptcy outcomes (Jiang, Li and Wang, 2010; Ivashina, Iverson, and Smith, 2016)
Future financing, investment, and payout policies (Roberts and Sufi, 2009; Demiroglu and James, 2010; Nini, Smith, and Sufi, 2012; Bradley and Roberts, 2015)
Transmission of private information (Massoud et al., 2010; Ivashina and Sun, 2011b)

7. Importance of Loan Renegotiations
An average syndicated loan is renegotiated multiple times throughout its life (Roberts, 2015).
Most of renegotiations occur outside of financial distress (Roberts and Sufi, 2009; Dennis and Wang, 2014).
Renegotiation is an effective mechanism to complete contracts and transfer control rights (Grossman and Hart, 1986, Hart and Moore, 1988; Aghion and Bolton, 1992; Preece and Mullineuax, 2009).
Through loan renegotiation, we can observe not only the changes in loan contracts, but also the changes in lending structure.

8. Data Loan characteristics: LPC DealScan
Lender identification: LPC Dealscan, CapitalIQ, Moody’s, Bloomberg, and SEC filings
Firm data: Compustat
Macroeconomic conditions:
GDP: US Bureau of Economic Analysis
Stock market return: CRSP
Banking sector leverage: FDIC
Aggregate credit spread: FRED

9. A Demonstration of How Loan Paths Are Created
This figure demonstrates a 5-year $100 million revolving credit facility as it goes through three rounds of renegotiations. The loan facility was granted to NaviSite, a provider of hosting, application management and managed cloud services for enterprises on June 8, 2007.
Renegotiation Round Round Round 3
First renegotiation (time 1)
Second renegotiation (time2)
Origination (time 0)
Third renegotiation (time 3)
06/08/ /12/ /01/ /30/2008

10. Loan Path Construction
We manually cross-check two sources of renegotiations:
Loan amendments collected by Dealscan.
Loan refinancing by matching similar loans with respect to borrowing firm, loan type, lead arranger, and issue date.
Final sample:
4,369 loan paths
7,408 renegotiation rounds
Loan path construction allows us to address selection issues regarding the loan type and borrowing firm

11. Example 1: Loan Path – No change
A 60-month $750 million term loan was granted to Dean Foods Co, a food and beverage company on August 29, The lending syndicate structure does not change the next time lenders negotiate with the borrower.
August 29, 2003
December 31, 2003
Lead Bank
Wachovia Bank
Banks
SunTrust Bank
Fleet Bank
Bank of Tokyo-Mitsubishi
Bank One
Nonbanks
General Electric Capital Corp

12. Example 2: Loan Path – Addition
A 60-month $75 million revolving credit was granted to Cross Country HealthCare Inc., a provider of healthcare recruiting and workforce solutions on November 10, In the next negotiation with the borrower a new nonbank is added.
October 11, 2005
September 9, 2008
Lead Bank
Wachovia Bank
Banks
Bank of America
Carolina First Bank
Commercia Bank
LaSalle Bank
National City Bank
US Bank
Nonbanks
General Electric Capital Corp
Siemens Credit Corp

13. Example 3: Loan Path – Leaving
A 15-month $22.44 million term loan was granted to Ducommun Inc, a provider of transportation services on November 9, In the next negotiation with the borrower, a nonbank is removed.
November 9, 2001
September 27, 2002
Lead Bank
Bank of America
Banks
Fleet Bank
Bank of Nova Scotia
Bank Austria
Bank One
Nonbanks
Alpine Enterprises Ltd

14. Probability of Exit: Model
L: lender
B: borrowing company
C: current renegotiation round
i: one of the nine lender types
Standard errors are clustered at loan level.
Continuous variables are winsorized at 0.5% level.
Fixed effects: year, borrowing firm industry, borrowing firm credit rating, loan type, and loan purpose.

15. Probability of Exit: Results (1)

16. Probability of Exit of Open-end Mutual Funds

17. Renegotiation Outcome: Model
Transition:
Number of lender type:
i: loan term referring spread, amount, maturity and covenant tightness
r: renegotiation round
Standard errors are clustered at firm levels.

18. Change in Amount, Maturity, and Spread (2) (the impact of transition in ownership structure)

19. Change in Amount, Maturity, and Spread (3) (The impact of change in the number of nonbanks)

20. Covenant Tightness (3) (The impact of change in the number of each nonbank)

21. Conclusions
Institutional lenders, especially open-end mutual funds, closed-end funds, and CLOs, are more likely than commercial banks to exit loan investments
Addition of nonbank investors implies higher cost of debt.
Participation of new commercial banks is associated with more restricted covenants.
Our results support the following notions:
Funding liquidity risk affects lenders’ decision to exit or stay.
Renegotiation costs are higher for institutional investors who hold less diversified portfolio and are less adept than banks in information collection.

22. Institutional Investors and Loan Dynamics
Mehdi Beyhaghi, Ca Nguyen, John Wald
University of Texas - San Antonio
American Finance Association 2018
PhD Student Poster Session