Factors Affecting Debt Decisions: Syndicated Loans vs. Corporate Bonds

Abstract

Following the recent developments and expansions in syndicated loans market, syndicate loans are currently accounted for around one-third of borrowers’ total public debt and equity financing. It is one of the main alternative debt instruments for corporations. Syndicated loans are bank loans by their settings but also have many of the corporate bonds’ characteristics. These characteristics have made syndicated loans hybrid debt instruments which combining features of both bank loans and bonds. This study investigates the financial factors behind syndicated loans issuance for a comprehensive sample from 2000 to 2016 of United States non-financial companies which are listed in New York Stock Exchange (NYSE) and NASDAQ. By directly comparing syndicated loans to corporate bonds, the specific firms’ financial characteristics that reflect transaction costs, debt renegotiation, inefficient liquidation concerns, and information asymmetries are linked to the firms’ debt decisions. The study of multinomial logistic regressions shows that larger firms have a higher likelihood to borrow debt from both markets simultaneously. In contrast with firms’ liquidation value, it limits the power firms’ size which led to lower likelihood to issue joint issuance. The multinomial results also show that the likelihood of raising funds through only one market at a time is higher than joint issuance in a period of crisis. This study also provides some evidences that the recent expansions and developments in syndicated loan market have blurred the distinctions and caused the convergence between two alternative debt markets, syndicated loan and corporate bond markets.