The Costs of Being Private:
Evidence from the Loan Market
Anthony Saunders
(New York University)
Sascha Steffen
(University of Mannheim)
45th Annual Conference on Bank Structure and Competition
Federal Reserve Bank of Chicago
May 6th, 2009
Motivation
• Between 1987-2007, more than 50% of syndicated
loans were allocated to private firms. However,
research has focused on large, publicly held firms.
• Literature on “Why do firms go private?” highlight
significant gains associated with going-private
transactions ignoring borrowing costs once these firms
are private.
• Sufi (2007): 90% of public firms have borrowed in the
syndicated loan market; syndicated lending represents
51% of US corporate finance
This Paper
• Do privately held firms face higher borrowing costs
in loan markets than publicly held firms?
• What are implications relating to borrowing costs
for firms remaining or going private?
• If there is a loan cost disadvantage for private
firms, which firms are affected most?
• Is there a role for relationships in mitigating this
loan cost disadvantage?
Our Empirical Setting
• Unique dataset from 1987 – 2007 relating to U.K.
syndicated loans
– Since Companies Act in 1964, private and public limited
liability companies have to disclose financial statements.
• Disclosure rules are enforced
• Statements in accordance with UK GAAP and audited
– We have detailed financial statement data for both public
and private firms together with the loan characteristics
– We match loans to public and private firms based on
propensity scores and compare loan spreads to both type
of firms
Data and Sample Selection
• LPC Dealscan database, Bureau van Dijk’s Amadeus
and Thomson’s SDC database to construct unique
dataset on U.K. syndicated loans (1987 – 2007)
• Amadeus has detailed financial statement data for
public and private firms which are hand-matched to
LPC
– We follow each company to identify name changes and
changes in corporate legal status (private or public)
• Final Sample of 1,742 loans to 485 UK based
borrowers
Data and Sample Selection (2)
• We complement the dataset
– Stock index affiliation (AIM, FTSE,…)
– I/B/E/S for analyst coverage
– Amadeus Ownership database for insider ownership
– Mergermarket and Factiva to identify private equity
involvement
• Public firms: 81% not private equity backed (17% PtP)
• Private firms: 34% not private equity backed (49% LBO)
– Secondary market trading for loan liquidity
• 33.5% of all loans are subsequently traded (41.8% of
private firm loans)
Key Loan and Borrower Characteristics
Private
(54.8%)
Public
(45.2%)
Difference
Loan Characteristics
AISD (basis points)
Facility Amount ($ million)
Maturity (months)
270
237
82
110
636
53
160***
-399***
29***
Borrower Characteristics
Total Assets ($ million)
Leverage (Debt/Equity)
Age (years)
1,616
0.28
23
8,985
0.25
34
-7,369***
0.03***
-11***
Propensity Score Matching
• We address self-selection into being public or
private using propensity score matched samples
(Rosenbaum/Rubin (1983))
1. Determinants of (i) being public and (ii) loan spreads
2. Estimate propensity score (probit model)
3. Estimate the effect of being public rather than private
on loan spreads
– Nearest Neighbor (NN) matching and Local Linear
(LL) matching
The Costs of Being Private
The Costs of Being Private (2)
Methodology
OLS
NN Matching
LL Matching
Coefficient
-35***
-32***
Std. Error
(9.10)
(8.53)
-29***
(10.61)
• Loan cost disadvantages are particularly pronounced
in high information asymmetry environments
– Stratify matched sample by size and age
• Results are robust across alternative information
proxies
Loan Spreads & Lending Relationships
• Do firms benefit from bank-borrower relationships?
If so, do public and private firms benefit equally from
bank-borrower relationships?
• A bank is a relationship lender if it had a lead
position among the syndicate members in a loan to
the same borrower within a 5 year period prior to
current loan.
• We compare loan spread differences between private
and public firms for relationship versus nonrelationship loans across different firm size quartiles
Loan Spreads & Lending Relationships (2)
Small Firms
Large Firms
Public
Firms
149bps
88bps
Private
Firms
186bps
113bps
Relationship Benefits
Public
Private
Difference Firms
Firms
37bps
35bps
30bps
25bps
62bps
22bps
• Public and private firms benefit from relationships
–
Large public borrowers have greater benefits than small public
borrowers.
–
Public firms (particularly large public firms) benefit more from
lending relationships than private firms.
–
Relationships are particularly valuable for small private firms.
Loan Spreads & Ownership Structure
• Insider ownership is higher for private firms which
leads to enhanced risk taking incentives (Amihud
and Lev (1981))
– Positive correlation between ownership and loans spreads
but private firms still pay higher spreads
• Private equity firms use higher leverage which
increases bankruptcy risk
– Loan spreads are higher in sponsored deals
– Private firms still pay higher spreads (even if no private
equity firm is involved)
Loan Spreads & Loan Liquidity
• Liquid markets for loans allows lenders to hedge
their exposure (diversification effect)
– If loans to private firms are less liquid, investors might
demand higher spreads
• Loans to private firms are more liquid: 41.8% are
traded in secondary market (versus 25.9% of loans
to public firms)
• Private firms still pay higher spreads after
controlling for loan liquidity
Conclusion
• Our results suggest that private firms face significant
loan cost disadvantages compared to publicly traded
firms.
• Small, opaque private firms are affected the most.
• The loan cost disadvantage is smaller if firms have a
high propensity of being public.
• Relationships reduce the cost of debt, but public
firms benefit more.