BANKING RELATIONSHIPS IN LOAN MARKETS

1. BANKING RELATIONSHIPS INLOAN MARKETS Discussion by Gregory F. Udell discussion of “Competition or Collaboration? The Reciprocity Effect in Loan Syndication” Jian Cai “Price Discovery and Dissemination of Private Information By Loan Syndicate Participants” Robert M. Bushman, Abbie J. Smith, and Regina Wittenberg-Moerman “The Cost of Being Private: Evidence from Loan Markets” Anthony Saunders and Sascha Steffen

2. THE COMMON THREAD:THE LOAN SYNDICATION MARKET Key research questions on syndication: • How does this market work? • Where does this market fit into the financial landscape? • How does it solve the inherent moral hazard problem in syndication? • How is information disseminated among and through participants? • What are the determinants of loan pricing in this market?

3. KEY CONTRIBUTIONS • Cai paper • Addresses one of these key questions: • The lead arranger moral hazard problem • Prior literature showed that reputation and loan retention were the key tools • This paper finds evidence of an important third tool • Syndication reciprocity • Consistent with anecdotal evidence on the syndication “club” effect

4. KEY CONTRIBUTIONS (cont.) • Bushman, Smith and Wittenberg-Moerman • Explores another key question: information dissemination • Presence of institutional investors accelerates price discovery in the equity markets • Indicates exploitation of private access to information • Adds another problem/challenge to the syndication issue

5. KEY CONTRIBUTIONS (cont.) • Saunders and Steffen • Using data from loan syndication market to address a key corporate finance issue: • Costs and benefits associated with the public vs. private choice • Finds that private companies pay more for debt than public companies • Methodology includes extensive controls and matching technology • Authors suggest that debt cost differences related to informational opacity

6. WHY DO WE CARE ABOUT THIS MARKET? • Loan syndication market is major source of finance of mid-sized and large firms • The loan syndication market is huge • Rapid growth in volume: 1992: $240 billion 2006: $1,700 billion • Precise data on stock of synd. loans not available – can be proxied by Shared Nat’l Credit Program (> $20 mill, shared by 3 or more fed insured banks) Total Commitments (2008): $2,789 billion Outstandings (2008): $1,208 billion Owned by US Banks (est.): $500 billion Total US Bank C&I Outsdandings (2008): $1,418 billion

7. THE COMMON DATA SOURCE:DEALSCAN LPC DATABASE • Extensive information about new loan originations in the global commercial loan market since 1988 • Many loans are syndicated – about 2/3 • Spans wide swath of borrowers from small midsize companies to very large companies • These companies are quite different in terms of opacity and access to external markets • LPC spawned a whole generation of research

8. THE CONTEXT: MANY DIFFERENT EXTERNAL MARKETS • Commercial loan market • Short term loans • Intermediate term loan • Mezzanine debt market • Medium term note market • Private placement market • Commercial paper market • Corporate bond market • Private equity market • Public equity market NOT ALL LPC FIRMS HAVE ACCESS TO ALL MARKETS

9. FIRM CONTINUUM AND ACCESS TO EXTERNAL FINANCE

10. FIRM CONTINUUM AND ACCESS TO EXTERNAL FINANCE LPC Coverage

11. FIRM CONTINUUM AND ACCESS TO EXTERNAL FINANCE Mid-sized firms

12. FIRM CONTINUUM AND ACCESS TO EXTERNAL FINANCE Large Firms

13. THE RELEVANCE OF ACCESS • Much research attention to individual markets • Relatively little attention to the choice of access across all markets • A lack of a complete understanding of why and when firms access different markets (and different combinations of markets) may hinder our analysis of individual markets • The Saunders and Steffen paper partially moves in the direction

14. COMMENTS ON SPECIFIC PAPERS • Cai paper • I’m a bit puzzled by the information asymmetry results • The reciprocity effect appears to be as important for transparent firms • But, transparent firms don’t need as much monitoring • Therefore, reciprocity (and other mitigation tools would seem less important) • May want to consider treating CP back-up L/Cs as a different animal • Again, context matters

15. COMMENTS ON SPECIFIC PAPERS (cont.) • Bushman, Smith and Wittenberg-Moerman • I would like to see more discussion of the linkage between the information generated by the arranger and institutional investor exploitation • Discovery speed enhanced by stronger banking relationships – BUT, relationship lending produces soft information that cannot be easily transmitted • How do institutional investors exploit the information? • Institutional investors nested in large mutual fund families? (e.g., Berzins, Liu and Trzcinka 2008) • Connection with Cai paper: • The stronger the solution to the moral hazard problem, the more info to exploit!

16. COMMENTS ON SPECIFIC PAPERS (cont.) • Saunders and Steffen • I’m not sure whether this is an equilibrium story or a disequilibrium story • Are firms leaving money on the table by not going public? • Or, does the association between the private-public spread and opacity suggest that opacity is a cause of not going public rather than an effect? • I would be careful in comparing the effect of banking relationships between large and small firms • Some evidence suggests that the type/nature of relationships quite different between large and small firms in the LPC data set (Gopalan, Udell and Yerrimilli 2008)

17. CONCLUSION • The LPC Dealscan dataset has given us a tremendous window into corporate financing. • These three papers have significantly added to our knowledge of external financing. • Must read for LPC “groupies” like me! • Must read for anyone interested in corporate finance