AN ANALYSIS OF SYNDICATED LOAN ANNOUNCEMENTS DURING THE GLOBAL FINANCIAL CRISIS

DOIhttp://doi.org/10.1111/jfir.12134
AuthorKim‐Song Le,Dominic Gasbarro,Robert G. Schwebach,J. Kenton Zumwalt
Published date01 December 2017
Date01 December 2017
AN ANALYSIS OF SYNDICATED LOAN ANNOUNCEMENTS DURING THE
GLOBAL FINANCIAL CRISIS
Dominic Gasbarro and Kim-Song Le
Murdoch University
Robert G. Schwebach and J. Kenton Zumwalt
Colorado State University
Abstract
The recent nancial crisis presents an opportunity to examine stockmarket reactions to
syndicated loandecisions reached by borrowers and lenders regarding loan type and loan
purpose. We ndthat during the crisis, the renegotiation exibility providedby revolving
creditis positively valued, whereasduring the low-interest-rateperiod following the crisis,
both revolving and term loans are viewed favorably. We also examine information
asymmetry effects and nd that after the crisis, low-creditworthy borrowers generate a
positive market response, but duringthe crisis, high-creditworthy borrowers are viewed
positively and low-creditworthy borrowers are punished by the market.
JEL Classification: G14, G21
I. Introduction
During the nancial crisis of 20072009, several large nancial institutions failed and the
government closed some of the institutions and forced consolidation with others. These
volatile nancial and economic conditions severely affected interest rates. The U.S.
government embarked on a program of quantitative easing, resulting in a substantial
decline in interest rates. Before the crisis, in early 2004, the bank prime rate was about
4%. The rate climbed steadily to about 8% in early 2006 and remained there until early in
the crisis in mid-2007. The prime rate decreased substantially during the crisis to about
3% in early 2009 and remained at that low level through 2012.
1
In these changing economic conditions, the importance of revolving credit,term,
and hybrid syndicated bank loans can be thoroughly examined. Revolving credit loans
provide exibility in the renegotiation of magnitude, maturity, pricing, and other
covenantsfor both the borrower and the lender. From a borrowers perspective,an increase
in the rmsnancialstrength can allow it to negotiate more favorableterms in the future; a
revolving credit loan is also benecial if market interest rates decline. Renegotiation also
The authors would like to thank associate editor David Harrison and an anonymous reviewer for valuable
guidance and suggestions that improved the paper. We also thank participants of the Accounting and Finance
Association of Australia and New Zealand (AFAANZ) 2016 annual conference and participants of the Murdoch
University School of Business and Governance Seminar Series for helpful comments and suggestions.
1
http://www.federalreserve.gov/datadownload/
The Journal of Financial Research Vol. XL, No. 4 Pages 535565 Winter 2017
535
© 2017 The Southern Finance Association and the Southwestern Finance Association
RAWLS COLLEGE OF BUSINESS, TEXAS TECH UNIVERSITY
PUBLISHED FOR THE SOUTHERN AND SOUTHWESTERN
FINANCE ASSOCIATIONS BY WILEY-BLACKWELL PUBLISHING
offers protection to the lender; if interestrates increase and/or the nancial strength of the
borrowerdeclines, the lender can insist on more stringentterms for the loan. Although term
loans are less exible, many term loans have adjustable interest rates, and to some extent,
both types of loans allow market timing as interest rates change.
Similarly, the purposes of loans can change as the economic environment varies
over time. The three most prevalent loan purposes during the study period are general
corporate purpose, leveraged buyout/mergers and acquisitions (LBO/MA), and
renancing. A general purpose/use
2
loan provides the borrower exibility in the use
of funds but limits the monitoring ability of the bank. To approve a general purpose loan,
the bank must have condence in how the funds will be used; hence, the loan provides a
signal about the creditworthiness of the borrower. LBO/MA loans include acquisition
borrowing, investments in other companies, and management buyouts. The demand for
LBO/MA loans should be affected by the nancial crisis as merger and buyout activity
varies over the period. Renancing loans include the rolling over of outstanding loans
and the opportunity to lock in a lower interest rate. Loan purposes vary as the nancial
crisis evolves and the borrowersshare price reactions to loan announcements reveal how
the market perceives the value of the loan.
Finally, the creditworthiness of the borrower can inuence the markets
perception of the value of the loan. With that in mind, the relation between market
reaction and borrower creditworthiness is examined. Presumably, rms with less
information asymmetry in all market/economic environments should be less affected
when loans are announced. Conversely, loan announcements by lower rated rms may
spark greater market reaction depending on whether the announcement is considered
good news or bad news. The three periods of different economic conditions immediately
before, during, and after the nancial crisis allow insight into the relation between
information asymmetry and loan announcements.
We provide evidence that the global nancial crisis caused different types of
syndicated loans and their respective purposes to be valued differently over the period.
Our results indicate that, overall, the market values revolving credit loans more highly
than term loans and hybrid loans. These results are consistent with the asymmetric
information and market timing explanations found in the nance literature. In addition,
borrowers that were granted general purpose loans during the crisis experienced positive
share price reaction. LBO/MA loans were viewed favorably in the pre- and postcrisis
periods but exhibited no share price reaction during the crisis period. Renancing loans
exhibited signicance only in the low-interest-rate postcrisis period. It should be noted
that in the postcrisis period when the rates were at historical lows, both academic and
practitioner publications report rms without immediate cash needs borrowed to take
advantage of the low rates.
3
2
We use loan use and loan purpose interchangeably throughout the article.
3
Anecdotally, even companies that did not require money immediately issued bonds because the
borrowing costs were too low to pass up.Companies took advantage of the low rates to issue approximately
$1 trillion of investment grade bonds in 2012, according to Matt Wirz, As Corporate-Bond Yields Sink,
Risks for Investors Rise,Wall Street Journal (August 12), https://www.wsj.com/articles/SB10000872396390444042
704577584792371582220.
536 The Journal of Financial Research

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