Bank loans and borrower value during the recent financial crisis
1. Bank loans and borrower value during
the recent financial crisis
Empirical evidence from France
Prof. Christophe J. Godlewski
UHA & EM Strasbourg (LaRGE Research Center)
Corporate Finance Day 2012, Ghent
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3. Summary
• Are bank loans (still) “special” ?
• Impact of bank loan announcements on firm’s value
• Event study using 253 large loans to French borrowers (01/2000 -
12/2009)
• Comparison before and during the crisis
• Bank loan terms + syndicate & firm characteristics
• Stock market reaction to bank loan announcements
• Stock market reaction to bank loan terms, syndicate features, borrower
characteristics
• Main results
• Market reaction is negative during crisis
• Change in bank loan terms & syndicate features during the crisis
• Negative and positive reactions are associated with different loan terms &
syndicate characteristics whether the loan is issued during or before the crisis
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4. Literature
• Bank loans and syndicated lending
• Banks screen & monitor borrowers => unique & valuable private information
=> lending decision = certification / signal
• Bank loan announcement = positive stock market reaction (abnormal return)
[James (1987) … Billett et al. (1995)…+
• But… more recent evidence against “specialness” *Billet et al. 2006, Fields
2006…+
• Syndicated loan = large loan granted by a pool of banks (arranger +
participants) to a borrower under a single loan agreement
• Worldwide market = 4 trillion USD in 2011
• Transactional & relationship features of bank lending
• Positive stock market reaction (Preece & Mullineaux 1996, Focarelli et al.
2008…) 4
5. Literature (cont.)
• Bank lending during boom & bust
• Relaxed lending standards during boom (less IA)
• => Bank loan “less special” during boom (lower certification value)
• Insignificant AR during pre-crisis period
• Increased screening and monitoring (more IA)
• “Wake-up call” during bust (De Haas & van Horen 2010)
• => Bank loan “more special” during bust (wake up call)
• Significant and positive AR during crisis period
• However… weak borrower need refinancing during crisis (Ivashina &
Scharfstein 2010) + adverse shocks to lenders affect their borrowers
• => Bank loan “less special” during bust
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9. Results (2/7)
• (significant) Loan, syndicate and borrower characteristics by CAAR (2000-2009)
CAAR [-1,0] > 0 CAAR [-1,0] < 0
Variable Mean Mean T or chi-2 test
Facility (MLN USD) 900,521 459,911 2,57**
Number of lenders 9,764 7,430 2,33**
% local lenders 60,708 71,469 3,05***
% local arrangers 58,306 70,842 3,31***
Total assets (MLN USD) 70 860 11 026 2,09**
Sales (MLN USD) 11 849 4 488 2,98***
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10. Results (3/7)
• (significant) Loan and bank syndicate characteristics by boom & bust
Crisis Pre-crisis
Variable Mean Mean T or chi-2 test
Maturity 4,844 1,535 -5,11***
Secured dummy 0,292 0,163 6,04**
Covenants dummy 0,311 0,177 6,22**
Number of lenders 6,811 9,830 3,27***
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11. Results (4/7)
• (significant) Loan and bank syndicate variables by CAAR by boom & bust periods
Crisis Pre-crisis
CAAR [-1,0] CAAR [-1,0] CAAR [-1,0] CAAR [-1,0]
>0 <0 >0 <0
T or chi-2 T or chi-2
Variable Mean Mean Mean Mean
test test
Facility 1088,200 436,780 -1,80* 780,420 478,550 -1,85*
Spread 176,900 105,900 -2,09** 108,600 138,900 1,49
Number of
3,188 2,052 -1,96* 2,147 2,486 1,14
tranches
Number of
6,854 6,776 -0,07 11,627 7,958 -2,49**
lenders
Number of
6,425 6,569 0,13 7,917 5,814 -1,84*
arrangers
% local
63,579 73,868 1,85* 59,127 69,496 2,25**
lenders
% local
60,056 72,078 2,03** 57,364 69,870 2,52**
arrangers
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12. Results (5/7)
• (significant) Borrower variables by CAAR over boom & bust periods
Crisis Pre-crisis
CAAR [-1,0] > CAAR [-1,0] < CAAR [-1,0] > CAAR [-1,0] <
0 0 0 0
T or chi-2 T or chi-2
Variable Mean Mean Mean Mean
test test
Total assets 122 950 8 298 -1,71* 38 738 13 227 -1,22
Sales 15 717 4 024 -2,25** 9 399 4 904 -1,88*
Equity ratio 23,938 33,545 2,99*** 28,410 26,868 -0,28
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13. Results (6/7)
• (significant) Regressions of CAR on main loan, syndicate and borrower characteristics
Variables X = loan & syndicate X = loan & syndicate & borrower
Crisis -0,6759** -1,0108***
(0,3073) (0,3456)
Crisis x log(Facility) -0,0330**
(0,0154)
Crisis x log(Lenders) -0,2760*
(0,1450)
Crisis x log(Sales) -0,1114***
(0,0420)
Crisis x Equity ratio -3,1248***
(1,0638)
N 195 195 195 152 152 152
R² 0,0959 0,0943 0,0899 0,1372 0,1257 0,1464
F-stat. 1,8463 1,8491 1,8876 2,4899 2,4585 2,8214
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14. Results (7/7)
• (significant) Financial constraints variables by CAAR over boom & bust periods
Crisis Pre-crisis
CAAR (-1,0) CAAR (-1,0) CAAR (-1,0) CAAR (-1,0)
>0 <0 >0 <0
T or W. / K-W T or W. / K-W
Variable Mean Mean Mean Mean
test test
Retained
776,106 -14 098,78 -0,97 1 693,01 1 267,56 -0,43
earnings
Free cash flow 1 416,51 127,891 -1,21 216,056 358,286 0,32
Short term
16 057,01 533,339 -1,39 8 576,25 1 118,95 -1,43
borrowings
Long term
28 733,18 2 851,61 -1,18 5 901,87 1 749,97 -1,68*
borrowings
Total lines of -3,38*** /
3 084,04 997,369 -2,10** / 4,42** 2 994,07 253,688
credit 11,47***
Total available
4 331,59 911,257 -0,72 / 0,52 1 555,67 469,572 -2,09** / 4,38**
lines of credit
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15. Discussion
• Are bank loans (still) “special” ?
• Significant & negative stock market reaction to bank loan announcements
• Mostly loans issued during crisis period
• No significant reaction during boom period
• Positive reaction for larger loans funded by smaller syndicates to large
borrower
• Bust “wake-up call”: loans with larger maturities, collateral, covenants, by
smaller syndicates
• However during crisis: positive reaction to larger loans a spreads, multiple
tranches, less local lenders, large borrowers with lower equity ratio
• Investors (more) concerned about financial constraints
• Bank loans are (not so) special... It depends !
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