On Loan Sales, Loan Contracting, On Loan Sales, Loan Contracting, and Lending Relationships and Lending Relationships Steven Drucker Steven Drucker Columbia Business School Columbia Business School & & Manju Puri Manju Puri Fuqua School of Business, Duke University Fuqua School of Business, Duke University September 2006 September 2006
39
Embed
On Loan Sales, Loan Contracting, and Lending Relationships Steven Drucker Columbia Business School & Manju Puri Fuqua School of Business, Duke University.
This document is posted to help you gain knowledge. Please leave a comment to let me know what you think about it! Share it to your friends and learn new things together.
Transcript
On Loan Sales, Loan Contracting, and On Loan Sales, Loan Contracting, and Lending RelationshipsLending Relationships
Steven DruckerSteven Drucker
Columbia Business SchoolColumbia Business School
&&
Manju PuriManju Puri
Fuqua School of Business, Duke UniversityFuqua School of Business, Duke University
September 2006September 2006
2
MotivationMotivation
Loan selling is important for banks and the economyLoan selling is important for banks and the economy Trading Volume: $154.8 billion in 2004 vs. $8.0 billion in 1991Trading Volume: $154.8 billion in 2004 vs. $8.0 billion in 1991
Diversification; Comply with Risk-Adequacy RegulationsDiversification; Comply with Risk-Adequacy Regulations
Allows Origination even when Funding ConstrainedAllows Origination even when Funding Constrained
Loan Sales Separate Origination from FundingLoan Sales Separate Origination from Funding
Agency ProblemsAgency Problems Moral Hazard Moral Hazard (Pennacchi 1988; Gorton & Pennacchi 1995)(Pennacchi 1988; Gorton & Pennacchi 1995)
Adverse SelectionAdverse Selection
How do banks overcome these problems?How do banks overcome these problems? Loan ContractingLoan Contracting
Access to Loans and Lending RelationshipsAccess to Loans and Lending Relationships Harm?Harm?
Reduce interaction that is critical to benefitsReduce interaction that is critical to benefits (Diamond 1991) (Diamond 1991)
Help?Help? Increased Capital From Non-BanksIncreased Capital From Non-Banks
Risk-Management Risk-Management Flexibility in Future Loan Origination Flexibility in Future Loan Origination
4
OutlineOutline
Data, Sample Selection, and Descriptive StatisticsData, Sample Selection, and Descriptive Statistics
Loan Sales and Loan ContractingLoan Sales and Loan Contracting Secondary Market Sales and CovenantsSecondary Market Sales and Covenants Agency Problems or Signaling?Agency Problems or Signaling?
Loan Sales, Access to Loans, and Lending RelationshipsLoan Sales, Access to Loans, and Lending Relationships Current LoansCurrent Loans Lending Relationships and Future LoansLending Relationships and Future Loans
Summary Summary
5
Data and Sample SelectionData and Sample Selection
Data, Sample Selection, and Descriptive StatisticsData, Sample Selection, and Descriptive Statistics
Loan Sales and Loan ContractingLoan Sales and Loan Contracting Secondary Market Sales and CovenantsSecondary Market Sales and Covenants Agency Problems or Signaling?Agency Problems or Signaling?
Loan Sales, Access to Loans, and Lending RelationshipsLoan Sales, Access to Loans, and Lending Relationships Current LoansCurrent Loans Lending Relationships and Future LoansLending Relationships and Future Loans
Summary Summary
8
Secondary Market Sales and CovenantsSecondary Market Sales and Covenants
Selling Loans Can Induce Agency ProblemsSelling Loans Can Induce Agency Problems
Financial Covenants Reduce Reliance on Seller’s InformationFinancial Covenants Reduce Reliance on Seller’s Information Monitoring MechanismMonitoring Mechanism
Buyer Exercises Control When Firm Performs PoorlyBuyer Exercises Control When Firm Performs Poorly
Borrower
Loan Buyer
Interest PaymentsInterest Payments
Loan Seller
Monitoring, FundingMonitoring, Funding
ScreeningScreening
Upfront FeesUpfront Fees
9
Secondary Market Sales and CovenantsSecondary Market Sales and Covenants
Univariate Relationship Between Covenants and Loan SalesUnivariate Relationship Between Covenants and Loan Sales
Multivariate Logit Model (Table 4) Multivariate Logit Model (Table 4) (link)(link)
Dependent Variable: Indicator for Loan is SoldDependent Variable: Indicator for Loan is Sold
Key Independent VariablesKey Independent Variables # of Financial Covenants (+)# of Financial Covenants (+) Net Worth Slack (-)Net Worth Slack (-)
Control VariablesControl Variables Lender Market Share; Borrower and Loan VariablesLender Market Share; Borrower and Loan Variables
Additional Mechanisms for Mitigating Agency Problems Additional Mechanisms for Mitigating Agency Problems Hold Larger Piece of Loan Hold Larger Piece of Loan (e.g. Dennis & Mullineaux 2000)(e.g. Dennis & Mullineaux 2000)
Syndicate Structure and Composition Syndicate Structure and Composition (Lee & Mullineaux 2004; Sufi 2005)(Lee & Mullineaux 2004; Sufi 2005)
Empirical PredictionEmpirical Prediction # of Covenants / Tighter Covenants have # of Covenants / Tighter Covenants have LESSLESS influence on influence on
probability of loan syndication (compared to loan sale)probability of loan syndication (compared to loan sale)
Empirical Model: Probability of Syndication (Table 5)Empirical Model: Probability of Syndication (Table 5) link)link)((
14
Primary Market Sales and CovenantsPrimary Market Sales and Covenants
Changes in Predicted Probabilities Changes in Predicted Probabilities (link)(link)
One Std. Dev Change Around the Mean (t-stats in parentheses)One Std. Dev Change Around the Mean (t-stats in parentheses)
Compared to Secondary Market Sales:Compared to Secondary Market Sales:
More Covenants – Similar EffectMore Covenants – Similar Effect
Tighter Covenants Tighter Covenants Increases Probability of Loan Increases Probability of Loan
Sale when lenders have Sale when lenders have LOW REPUTATIONLOW REPUTATION
Evidence is consistent with agency viewEvidence is consistent with agency view
17
Agency or Signaling?Agency or Signaling?
Does Restrictive Covenant Package Does Restrictive Covenant Package SignalSignal Borrower Quality? Borrower Quality?
Empirical PredictionEmpirical Prediction High Risk High Risk Covenants have LARGER influence on probability of Covenants have LARGER influence on probability of
loan selling loan selling
Modify Loan Sales Model (Table 7) Modify Loan Sales Model (Table 7) (link)(link)
Interact Distance-to-Default Indicators with Covenant VariablesInteract Distance-to-Default Indicators with Covenant Variables
KEY RESULTS: Largest Effect on Loan Sale Probability KEY RESULTS: Largest Effect on Loan Sale Probability # of Financial Covenants: LOW RISK BORROWERS# of Financial Covenants: LOW RISK BORROWERS
Evidence is NOT consistent with signaling viewEvidence is NOT consistent with signaling view
18
OutlineOutline
Data, Sample Selection, and Descriptive StatisticsData, Sample Selection, and Descriptive Statistics
Loan Sales and Loan ContractingLoan Sales and Loan Contracting Secondary Market Sales and CovenantsSecondary Market Sales and Covenants Agency Problems or Signaling?Agency Problems or Signaling?
Loan Sales, Access to Loans, and Lending RelationshipsLoan Sales, Access to Loans, and Lending Relationships Current LoansCurrent Loans Lending Relationships and Future LoansLending Relationships and Future Loans
Summary Summary
19
Loan Sales and Access to LoansLoan Sales and Access to Loans
Restrictive Covenants / Loan Sales Impose Costs on BorrowersRestrictive Covenants / Loan Sales Impose Costs on Borrowers
More Likely to Receive Future LoansMore Likely to Receive Future Loans
More Likely to Continue Lending RelationshipsMore Likely to Continue Lending Relationships
23
Loan Sales and Lending RelationshipsLoan Sales and Lending Relationships
Explore: Risk Management Explore: Risk Management Lending Flexibility Lending Flexibility Do Loan Sales Increase Relationship Durability for High Risk Do Loan Sales Increase Relationship Durability for High Risk
Firms? High Reputation Lenders?Firms? High Reputation Lenders?
Univariate Results (Table 9):Univariate Results (Table 9):Conditional on Receiving Another Loan, % that Keep Same Lead BankConditional on Receiving Another Loan, % that Keep Same Lead Bank
Loan Sales and Lending RelationshipsLoan Sales and Lending Relationships
Nested Logit Model (Table 10) Nested Logit Model (Table 10) (link)(link)
Independent Variables: “Borrow Again” Independent Variables: “Borrow Again” Borrower Characteristics; Year Fixed EffectsBorrower Characteristics; Year Fixed Effects
Independent Variables: “Borrow Again” and “Keep Lender” Independent Variables: “Borrow Again” and “Keep Lender” Loan is SoldLoan is Sold; Lender Market Share; Prior Lending Relationship; Lender Market Share; Prior Lending Relationship
Borrow Borrow AgainAgain
Don’t BorrowDon’t Borrow
AgainAgain
KeepKeepLenderLender
Don’t KeepDon’t KeepLenderLender
25
OutlineOutline
Data, Sample Selection, and Descriptive StatisticsData, Sample Selection, and Descriptive Statistics
Loan Sales and Loan ContractingLoan Sales and Loan Contracting Secondary Market Sales and CovenantsSecondary Market Sales and Covenants Agency Problems or Signaling?Agency Problems or Signaling?
Loan Sales, Access to Loans, and Lending RelationshipsLoan Sales, Access to Loans, and Lending Relationships Current LoansCurrent Loans Lending Relationships and Future LoansLending Relationships and Future Loans
Summary Summary
26
SummarySummary
Loan Selling Separates Origination and FundingLoan Selling Separates Origination and Funding Agency Problems Agency Problems Loan ContractingLoan Contracting
Access to Loans and Lending RelationshipsAccess to Loans and Lending Relationships
Sold Loans Have Additional, Tighter CovenantsSold Loans Have Additional, Tighter Covenants Consistent With Covenants Used When Agency Problems Are LargerConsistent With Covenants Used When Agency Problems Are Larger
Signaling Not SupportedSignaling Not Supported
Sold Borrowers: Debt-Dependent, Receive Additional Private DebtSold Borrowers: Debt-Dependent, Receive Additional Private Debt Benefit to Offset Costs of Restrictive Covenants / Loan SalesBenefit to Offset Costs of Restrictive Covenants / Loan Sales
Sold Borrowers get Future Loans, Keep Lending RelationshipsSold Borrowers get Future Loans, Keep Lending Relationships Additional Capital and Flexibility for LendersAdditional Capital and Flexibility for Lenders
Table 2 (continued):Table 2 (continued):Univariate Analysis - Sold Loans vs. Not Sold Loans Univariate Analysis - Sold Loans vs. Not Sold Loans (link)(link)