Economic value in tranching of syndicated loans |
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Authors: | Pankaj Kumar Maskara |
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Affiliation: | Eastern Kentucky University, 521 Lancaster Avenue, Richmond, KY 40475, United States |
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Abstract: | This paper presents a theory to explain the economic value of tranching and provides empirical evidence to support the theoretical implications. I show that riskier firms are more likely to take loans with multiple tranches. Therefore, the average credit spread on a syndicated loan with multiple tranches is higher than that on a non-tranched loan. However, after accounting for the risk characteristics of a tranched loan, I show that borrowings that are a part of tranched loans have lower credit spreads than otherwise identical non-tranched loans. I also show that the benefits of tranching accrue primarily to riskier borrowers. |
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Keywords: | G21 |
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