Syndicated Loan Pricing and the 1988 Basel Capital Accord

This paper systematically analyses the market for syndicated loans over the period from 1982 till 2000. A sub-sample of high-information loans is studied over the period from 1982 until 2000. Aspects such as market credit quality, average spreads, average tenors and other market characteristics like geographic distribution and attribution of market growth are investigated. I find a deteriorating overall market credit quality that comes along with a regressive international diversification. Moreover, there is evidence that the good risks changed their habitat over the sample period and increasingly used the syndicated loan market for short-term financial needs and presumably went to the bond market for their long-term debt. Statistical tests show that the average spreads and maturities are not constant, but experienced a structural break that coincides with the coming into force of the 1988 Basle Capital Accord. Depending on the rating class these characteristics exhibit very diverse patterns. A regression analysis of the spreads on a group of explanatory variables composed of .rm speci.c as well as macro-economic variables reveals that there is a statistically and economically significant discount for loans first tranches during the whole period and that in the pre-Basle I period macro-economic variables helped little in explaining the spreads. In the post-Basle I period however, most of these variables were (highly) significant, suggesting that syndicated loan pricing is conducted much more systematically since the Basle I Capital Accord came into force.