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Working Paper
What Do Lead Banks Learn from Leveraged Loan Investors?
In leveraged loan deals, lead banks use bookbuilding to extract price-relevant information from syndicate participants. This paper examines the content of such information. We find that pricing adjustments during bookbuilding are highly informative, not only about investors’ required risk premium but also about borrower quality. A one-percentage-point increase in loan spread predicts a 0.8% higher excess return, a proxy for risk premium, over the first 3 months of secondary market trading. More importantly, it also predicts a 3% higher probability of subsequent default, implying that ...