On Loan Sales Loan Contracting and Lending Relationships
- Slides: 39
On Loan Sales, Loan Contracting, and Lending Relationships Steven Drucker Columbia Business School & Manju Puri Fuqua School of Business, Duke University September 2006
Motivation Loan selling is important for banks and the economy § Trading Volume: $154. 8 billion in 2004 vs. $8. 0 billion in 1991 § Diversification; Comply with Risk Adequacy Regulations § Allows Origination even when Funding Constrained Loan Selling Fundamentally Alters Lending Screening, Monitoring, Funding Upfront Fees Borrower Loan Seller Lender Interest Upfront Fees, st Payments Monitorin g, Fundi ng Loan Buyer 2
Main Issues Loan Sales Separate Origination from Funding Agency Problems § Moral Hazard (Pennacchi 1988; Gorton & Pennacchi 1995) § Adverse Selection § How do banks overcome these problems? Loan Contracting Access to Loans and Lending Relationships § Harm? Reduce interaction that is critical to benefits (Diamond 1991) § Help? Increased Capital From Non Banks Risk Management Flexibility in Future Loan Origination 3
Outline q Data, Sample Selection, and Descriptive Statistics q Loan Sales and Loan Contracting § Secondary Market Sales and Covenants § Agency Problems or Signaling? q Loan Sales, Access to Loans, and Lending Relationships § Current Loans § Lending Relationships and Future Loans q Summary 4
Data and Sample Selection Sample Period: 1999 2004 Data from four sources with some data matched by hand § Loans & Lending Relationships (LPC Deal. Scan) § Identify Traded Loans (LSTA Mark to Market Pricing) § Borrower Financial Characteristics (Compustat) § Equity Market Data (CRSP) Sample Sizes (link) 5
Sold Loans and Information Asymmetry Sold Borrowers are larger and rated (link) § Information Transparency Sold Loans are Term Loans instead of Credit Lines § Monitoring Lead Lender on Sold Loan has Higher Market Share § Reputation 6
Outline q Data, Sample Selection, and Descriptive Statistics q Loan Sales and Loan Contracting § Secondary Market Sales and Covenants § Agency Problems or Signaling? q Loan Sales, Access to Loans, and Lending Relationships § Current Loans § Lending Relationships and Future Loans q Summary 7
Secondary Market Sales and Covenants Selling Loans Can Induce Agency Problems Screening Upfront Fees Borrower Loan Seller Interest Paymen ts Monitorin g, Fundi ng Loan Buyer Financial Covenants Reduce Reliance on Seller’s Information § Monitoring Mechanism § Buyer Exercises Control When Firm Performs Poorly 8
Secondary Market Sales and Covenants Univariate Relationship Between Covenants and Loan Sales Multivariate Logit Model (Table 4) (link) § Dependent Variable: Indicator for Loan is Sold Key Independent Variables § # of Financial Covenants (+) § Net Worth Slack ( ) Control Variables § Lender Market Share; Borrower and Loan Variables 9
Secondary Market Sales and Covenants Changes in Predicted Probabilities (link) § One Std. Dev Change Around the Mean (t stats in parentheses) Key Results: § More Covenants Increases Probability of Loan Sale § Tighter Covenants Increases Probability of Loan Sale 10
Are Loans Structured to Sell to Others? Sold Loans are Nearly Always Syndicated (Primary Market) Loans are Sold Close to the Loan Origination Date (link) 11
Are Loans Structured to Sell to Others? Banks are not dumping poorly performing loans Distribution of Initial Sale Prices Performance of Sold Borrowers: Origination to Sale 12
Agency or Signaling? Syndication: Primary Market Sales Additional Mechanisms for Mitigating Agency Problems § Hold Larger Piece of Loan (e. g. Dennis & Mullineaux 2000) § Syndicate Structure and Composition (Lee & Mullineaux 2004; Sufi 2005) § Expect Smaller Agency Problems Empirical Prediction § # of Covenants / Tighter Covenants have LESS influence on probability of loan syndication (compared to loan sale) Empirical Model: Probability of Syndication (Table 5) link) ( 13
Primary Market Sales and Covenants Changes in Predicted Probabilities (link) § One Std. Dev Change Around the Mean (t stats in parentheses) Compared to Secondary Market Sales: § More Covenants – Similar Effect § Tighter Covenants – Weaker Effect Evidence is consistent with agency view 14
Agency or Signaling? Lower Reputation Lender Increased Agency Problems § Gorton & Haubrich (1987); Pichler & Wilhelm (2001) Empirical Prediction § Low Reputation Lender # of Covenants / Tighter Covenants have LARGER influence on probability of loan selling Modify Loan Sales Model (Table 6) (link) § Interact Reputation Indicators with Covenant Variables 15
Lender Reputation Changes in Predicted Probabilities of Selling Loans (link) § One Std. Dev Change Around the Mean (t stats in parentheses) Key Result: § Tighter Covenants Increases Probability of Loan Sale when lenders have LOW REPUTATION Evidence is consistent with agency view 16
Agency or Signaling? Does Restrictive Covenant Package Signal Borrower Quality? Empirical Prediction § High Risk Covenants have LARGER influence on probability of loan selling Modify Loan Sales Model (Table 7) (link) § Interact Distance to Default Indicators with Covenant Variables KEY RESULTS: Largest Effect on Loan Sale Probability § # of Financial Covenants: LOW RISK BORROWERS § Net Worth Slack: MID RISK BORROWERS Evidence is NOT consistent with signaling view 17
Outline q Data, Sample Selection, and Descriptive Statistics q Loan Sales and Loan Contracting § Secondary Market Sales and Covenants § Agency Problems or Signaling? q Loan Sales, Access to Loans, and Lending Relationships § Current Loans § Lending Relationships and Future Loans q Summary 18
Loan Sales and Access to Loans Restrictive Covenants / Loan Sales Impose Costs on Borrowers § Managerial Flexibility § Additional Lenders Renegotiation Costs Why do Borrowers Agree to Restrictive Covenants / Loan Sales? EXPLORE: Access to Private Debt Capital § Loan Buyers are Usually Non. Banks Additional Capital 19
Current Loans Key Results § Sold Borrowers are Growing and Debt dependent § Sold Year: Increase in Private Debt Issuance 20
Loan Sales and Lending Relationships Loan Sales Separate Origination from Monitoring / Funding Screening Upfront Fees Borrower Loan Seller Interest Paymen ts Monitorin g, Fundi ng Loan Buyer Harm Access to Future Credit / Relationships? § Reduced Ongoing Interaction (Diamond 1991; Boot & Thakor 1994) Help Access to Future Credit / Relationships? § New Source of Capital § Reduced Exposure to Individual Borrowers Flexibility 21
Loan Sales and Lending Relationships Univariate Results (Table 9) Sold Borrowers are § More Likely to Receive Future Loans § More Likely to Continue Lending Relationships 22
Loan Sales and Lending Relationships Explore: Risk Management Lending Flexibility § Do Loan Sales Increase Relationship Durability for High Risk Firms? High Reputation Lenders? Univariate Results (Table 9): Conditional on Receiving Another Loan, % that Keep Same Lead Bank 23
Loan Sales and Lending Relationships Nested Logit Model (Table 10) Don’t Borrow Again (link) Borrow Again Keep Lender Don’t Keep Lender Independent Variables: “Borrow Again” § Borrower Characteristics; Year Fixed Effects Independent Variables: “Borrow Again” and “Keep Lender” § Loan is Sold; Lender Market Share; Prior Lending Relationship 24
Outline q Data, Sample Selection, and Descriptive Statistics q Loan Sales and Loan Contracting § Secondary Market Sales and Covenants § Agency Problems or Signaling? q Loan Sales, Access to Loans, and Lending Relationships § Current Loans § Lending Relationships and Future Loans q Summary 25
Summary Loan Selling Separates Origination and Funding § Agency Problems Loan Contracting § Access to Loans and Lending Relationships Sold Loans Have Additional, Tighter Covenants § Consistent With Covenants Used When Agency Problems Are Larger § Signaling Not Supported Sold Borrowers: Debt Dependent, Receive Additional Private Debt § Benefit to Offset Costs of Restrictive Covenants / Loan Sales Sold Borrowers get Future Loans, Keep Lending Relationships § Additional Capital and Flexibility for Lenders 26
Tables 27
Table 1: Loan Sample Summary Statistics (link) 28
Table 2: Univariate Analysis- Sold Loans vs. Not Sold Loans ) 29
Table 2 (continued): Univariate Analysis - Sold Loans vs. Not Sold Loans (link) 30
Table 3: Sold Loans – Timing, Pricing, and Performance ) (link) 31
Table 4: Probability of Selling Loans (link) 32
Table 5: Probability of Loan Syndication (link) 33
Table 6: Probability of Selling Loans - Lender Reputation (link) 34
Table 7: Probability of Selling Loans – Borrower Risk (link) 35
Table 8: Loan Sales and Debt Capital 36
Table 9: Univariate Analysis - Keeping the Same Lender 37
Table 10: Nested Logit Models- Keeping the Same Lender 38
Table 10 (continued): Nested Logit Models – Borrowing Again (link) 39
- Sales organizational structure
- Discuss the nuances of sales letters.
- Incremental method of sales force example
- Procedure for designing sales territory
- Relie respondible lending solution
- An institution for receiving, keeping and lending money
- Lending policies and procedures managing credit risk
- Securities lending and borrowing example
- Queensbridge map
- Relie responsible lending and insights engine
- Relie responsible lending and insights engine
- Relie responsible lending and insights engine
- Relie responsible lending and insights engine
- Sales force composite
- Uo purchasing and contracting
- Some common trafficking in persons contract violations
- Interpersonal process issues in entering and contracting
- Exblowra trading and contracting
- Illegal money lending team
- Student lending analytics
- Overt discrimination
- Principles of credit analysis
- Cannons of lending
- Cplp down payment assistance
- Socially responsible lending
- Sound lending principles
- Life below zero: bank lending under negative policy rates
- Jblm reassignments
- Principles of lending
- Lending
- Forms of international lending
- Wacof
- Approval authority
- Fractional reserve banking
- Ffiec fair lending examination procedures appendix
- Khushhali bank karobar loan
- Teejan contracting
- Contract matrix template
- Each contracting state may
- Nrcg contracting for fire