What influences the spread in the European syndicated loan market?

This thesis investigates the loan pricing of syndicated loans to European based companies. Unlike traditional lending, a syndicated loan is provided by several lenders who constitute a syndicate. These different players are not all involved in a bilateral relationship with the borrower. Consequently, information asymmetry may arise. Even though several institutions supply the loan, the latter is governed by only one contract, meaning that every institution taking part in the syndicated loan, faces the same underlying terms and agreements. Therefore, if one of the syndicate members fails to honor its obligation, syndicate members have no legal obligation on that failing member’s behalf. The main reason why banks syndicate a loan is to diversify their portfolios in order to reduce their credit exposure. The first syndicated loan was performed in 1968 in London. In spite of financial crisis, the European market has experienced an outrageous growth since 1985. Based on a sample of 658 European syndicated loans and using OLS and Heckman models, our results suggest that self-selection occurs in this market. Reputable banks focus their investments on safer and more marketable loans whereas institutional lenders have adopted an opposite strategy. There is evidence that a home bias is present in this market. Syndicated loans provided by foreign institutions are significantly more expensive. Contrary to previous literature findings, top tier arrangers are not able to offer advantageous loan terms to their clients. The competitive environment doesn't allow a financial institution to clearly outperforms its peers. Our results give support to the general belief that institutional investors are the lenders of last resort. Finding from previous studies are mostly confirmed in what concerns the loan's characteristics (maturity, loan size) and borrowers characteristics (credit rating). Inconsistent with the literature, we reject the hypothesis that companies traded on a stock exchange are offered better loan pricing. Companies active in this market are quite large and must disclose private information. Besides, the underwriters must communicate adequate pieces of information regarding both the project and the borrower's financial health. In the financial industry, reputation is perceived as a proxy for competency and trust. Therefore, they have no incentive to trick their partners. Our work supports the diversification theory and tends to reject the certification hypothesis. Larger syndicates are able to offer better pricing whereas the lead arranger's retention rate is positively correlated to the spread. Through this thesis, we contributed to a much under-researched European syndicated loan market while taking into consideration recent development in this field of study. Most of previous researches focus their analysis on the American market. Besides, our work gives support to the argument that self-selection arises in this market and investigates its potential effects.