Co-Lead Arrangement in Syndicated Loans

Abstract

A syndicated loan involves either a single lead arranger who takes charge of the screening and monitoring of borrowers or multiple lead arrangers who jointly conduct the syndication tasks. We postulate that a co-lead syndicate structure, by allowing multiple lead arrangers to collaborate and monitor each other, can mitigate agency problems between lead and participant lenders. As lead arrangers’ simultaneous holding of borrowers’ equity (hereafter, dual holding) exacerbates potential agency problems within a syndicate, we hypothesize that a co-lead syndicate structure is more likely to be used when syndicated loans involve lead arrangers with dual holding. Empirical findings are consistent with our hypothesis and are unlikely explained by the endogeneity of lead arrangers’ dual holding status. We also explore the hierarchy within the lead arranger group, and find that dual holding by dominant lead arrangers is more likely to invite subordinate lead arrangers without dual holdings but with expertise in the borrowers’ industry. The overall evidence suggests that a co-lead syndicate structure helps dual lead arrangers to address potential agency problems with participant lenders and facilitate loan syndication.