The Determinants of Risky Loans

Although each bank in a syndicate is ultimately responsible for its own credit analysis, the arranger is responsible for analyzing the credit quality of the borrower and negotiating the key terms of a loan contract. Also, in a best efforts bid, the arranger underwrites some portion of loan and thus takes on the risk if the market does not accept the deal. To compensate for the service and risk, the arranger and other members of the lead management team earn some form of upfront fee, which is one element of the syndicated loan price. I estimate a model that addresses the upfront fees of syndicated loans originated in Korea, employing a sample of 122 facilities. I find empirical evidence that issues of potential moral hazard and borrower reputation affect the level of upfront fee that the borrower is supposed to pay to the arranger. Also, other factors reflecting the relevance of monitoring costs and borrower s profitability have an impact on the fee structure of borrowing.