The impact of lending relationships on the choice and structure of bond underwriting syndicates
Introduction
The common practice in issuing debt in capital markets has shifted from the use of a sole bank as bookrunner1 to multiple bookrunning. Simultaneously, the number of joint bookrunners in bond offerings has increased sharply in recent years, particularly during the financial crisis, as shown in Fig. 1.
Some investment bankers have reported that the rise of multiple bookrunning is explained to a large extent by firms’ decision to favor their bank relationships in difficult times as a reward mechanism: “When times are tough and balance sheets scarce, putting your relationship bank on a deal as a passive bookrunner is an easy and also very visible way of rewarding them.” 2The rise of multiple bookrunning has occurred as commercial banks have recently become active entrants to the debt underwriting business, taking advantage of the relationships and experience they have accumulated in lending markets (Ang and Zhang, 2004, Gande et al., 1997, Shivdasani and Song, 2011, Yasuda, 2005). Furthermore, investment chiefs highlight that multiple-bookrunner deals arise as a result of issuers’ demand. They argue that there have been a number of issuers requesting to appoint several banks as bookrunners. This seems to have occurred because issuers have recently gained bargaining power from potential bookrunners (Dunbar and King, 2019).
While prior studies examine the outcomes of having more than one bookrunner on a deal, providing evidence of the benefits (greater visibility, mitigation of agency problems and positive price adjustments (e.g. Corwin and Schultz, 2005, Huang and Zhang, 2011, Jeon et al., 2015, Jo et al., 2012) and the costs (information leakage and lower screening incentives (e.g. Asker and Ljungqvist, 2010, Shivdasani and Song, 2011), this paper takes one step back and explores the choice and structure of multiple-bookrunner bonds. Unlike prior studies, we specifically examine the impact of firm–bank relationships on the issuance of multiple-bookrunner deals.
This research focus is relevant because a relationship orientation is also present in investment banking activities such as underwriting (Boot, 2000). The structure of firm–bank relationships affects firms’ access to funds (Carletti, 2004, Detragiache et al., 2000, Hasan et al., 2019, von Thadden, 2004), which is crucial during economic downturns (Beck et al., 2018, Gobbi and Sette, 2014, Iyer et al., 2014, Jiménez et al., 2012, López-Espinosa et al., 2017, Schäfer, 2019). Relationships are very important in shaping bank competition in the bond underwriting market (Yasuda, 2005, Yasuda, 2007). A relationship bank is more likely to be chosen as a bookrunner (Bharath et al., 2007, Drucker and Puri, 2005, Duarte-Silva, 2010, Ljungqvist et al., 2006). However, while the existence of a relationship is jointly valuable to the firm and its bookrunner (Burch et al., 2005, Ellis et al., 2011, Fernando et al., 2005, Fernando et al., 2012), reputation also plays a role in underwriting. Reputable bookrunners are more credible certifiers in capital markets (Beatty and Ritter, 1986, Booth and Smith, 1986, Carter and Manaster, 1990, Chemmanur and Fulghieri, 1994). Banks preserve their reputational capital because reputation acts as a certification signal (Fang, 2005, Livingston and Miller, 2000).
Our paper contributes to the extant literature on underwriting by exploring how firm–bank relationships affect the choice of a multiple-bookrunner deal (instead of a sole-bookrunner deal) and the total number of banks acting as bookrunners. In particular, we compare the impact of these relationships before and during the global financial crisis. Additionally, this study contributes to the literature on bond underwriting by exploring how banks’ reputational concerns affect the formation of multiple-bookrunner deals.
The empirical analysis relies on a sample of 1887 corporate bonds issued in Europe between 2003 and 2013. Our unique dataset contains detailed information about bond issuers, banks’ roles in bond offerings and firm–bank relationships. By focusing on Europe, where firms are more dependent on bank funding than in the US, we are able to more clearly identify the impact of firm–bank relationships on multiple bookrunning. However, since the multiple-bookrunning trend is also observed in market-based systems,3 our findings may also apply to firms with strong firm–bank relationships in market-based systems. Moreover, our choice of research period allows us to examine whether the global financial crisis and the events that followed altered the impact of firm–bank relationships on the choice and structure of multiple bookrunning in bond offerings.
We answer the research question by conducting several empirical analyses. Firstly, we employ discrete choice models to explain the choice of a multiple-bookrunner deal instead of a sole-bookrunner deal, as well as the total number of bookrunners on a deal. Secondly, we employ an issuer– bookrunner matching model to study the issuer's choice of bookrunners. Finally, we use additional discrete choice models to study the drivers of being a joint bookrunner.
By way of preview, we find that firm–bank relationships affect the multiple-bookrunning choice in debt markets. The likelihood of issuing a multiple-bookrunner bond increases by 17.75% if the firm has borrowing relationships at the bond issuance. Furthermore, the strength of the firm–bank relationship is also relevant. Firms with strong relationships with lenders are less likely to appoint several bookrunners. However, during the crisis years, the opposite effect is found. We also find that a bank that has served as bookrunner or lender to the issuing firm in the two years prior to a deal is more likely to act as bookrunner for the current deal.
The likelihood of a bank being appointed as bookrunner is also larger if the bank was bookrunner (lender) in the latest bond (loan) issued by the firm. Moreover, we find that firm–bank lending relationships had a larger impact on the firm–bookrunner matching during the crisis compared to before the crisis. This latter finding suggests that, as some investment bankers have argued, these relationships become more relevant in difficult times. Finally, we find that reputable bookrunners are less likely to become joint bookrunners if their potential partners are substantially less reputable. Our results are found to be robust after accounting for potential informational asymmetry biases, a flight home effect, the impact of equity underwriting relationships and a firm size effect. Moreover, we conduct additional checks by using alternative time windows and running subsample analyses.
The remainder of the paper is organized as follows. Section 2 provides an overview of the structure and regulatory framework of the European bond markets. Section 3 reviews the related literature. The hypotheses are discussed in Section 4. Section 5 describes the dataset and the empirical identification employed. Section 6 discusses the main empirical results, while Section 7 explores the drivers of multiple bookrunning and its costs. Section 8 offers a number of robustness checks. Section 9 concludes.
Section snippets
European bond markets: Structure and regulation
Since this paper examines the multiple-bookrunning phenomenon in the European bond markets, this section provides a general overview of the main features of these markets as well as their regulatory framework.
Related literature
Our paper is mainly related to three strands of the academic literature: multiple bookrunning and its implications, the role of firm–bank relationships in underwriting and the structure of bond syndicates.
Prior studies on multiple bookrunning have focused primarily on the rise in multiple-bookrunner deals and the implications of having more than one bookrunner on a deal. In this sense, Hu and Ritter (2007) examine the U.S. IPO market and conclude that the choice of multiple bookrunning is
Firms’ relationships and multiple-bookrunner bonds
While firm–bank relationships are relevant in choosing a bookrunner (Bharath et al., 2007, Drucker and Puri, 2005, Duarte-Silva, 2010, Gande et al., 1999, Ljungqvist et al., 2006), the question is whether these relationships also affect the decision to include one or multiple bookrunners in a bond offering.
Ongoing firm–bank relationships have profound effects on the behavior of intermediaries and the quality of intermediary services (Song, 2004). Some studies argue that investors might exhibit
Data
Our primary data are non-financial corporate bonds issued in Europe from January 1, 2003 to December 31, 2013, which were sourced from the Dealogic Debt Capital Markets database. The sample comprises fixed non-perpetual corporate bond issues, excluding those deals issued by utilities and regulated (SIC: 4000 s) or financial firms (SIC: 6000 s), as well as deals that do not report information about the bookrunner parent and issue rating at launch for at least one tranche. Our final sample
Determinants of multiple-bookrunner deals
Table 3 offers some descriptive statistics and the results of the tests for differences in means (t-statistics) and medians (Wilcoxon rank sum statistics) for a number of characteristics across sole- and multiple-bookrunner bonds. In particular, multiple-bookrunner bonds appear to be larger in size. Callable bonds with a longer maturity are more likely to have several bookrunners. It is also worth noting that most domestic bonds are placed by just one bank. As international bonds are mainly
A reward mechanism or an informational asymmetries problem?
As mentioned above, according to the industry, a reward mechanism led firms to favor their prior relationships. However, during a financial crisis, the information asymmetry problem is likely to worsen. Larger informational asymmetries may affect the matching between firms and bookrunners. It is therefore relevant to distinguish the impact of information asymmetries from that of a reward mechanism. To do so, we conduct a counterfactual analysis estimating the likelihood that a bank would be
A flight home effect?
An important concern regarding our baseline findings is that the reward mechanism might hide a potential home-bias effect. We estimate the likelihood of being chosen in the subsample of bookrunners that are based in the same country as the issuer (home-based banks). In addition, we explore whether the ratio of home-based bookrunners is larger in multiple-bookrunner bonds during the crisis compared to the pre-crisis period, as well as whether the ratio increases with the number of bookrunners.
Conclusions
During the last few decades, the issuance of multiple-bookrunner bonds and the appointment of a large number of bookrunners has become more common. This trend has strengthened significantly since the financial crisis. The industry has reported that multiple bookrunning is the result of issuers’ demands, because firms favor their relationship banks as bookrunners in difficult times. In this paper, we examine the impact of firm–bank relationships on the issuance of multiple-bookrunner deals using
CRediT authorship contribution statement
Santiago Carbó-Valverde: Investigation, Conceptualization, Methodology, Writing – original draft, Writing - review & editing, Visualization. Pedro J. Cuadros-Solas: Investigation, Conceptualization, Methodology, Data curation, Writing – original draft, Writing - review & editing, Visualization. Francisco Rodríguez-Fernández: Investigation, Conceptualization, Methodology, Writing – original draft, Writing - review & editing, Visualization.
Declaration of Competing Interest
The authors declare that they have no known competing financial interests or personal relationships that could have appeared to influence the work reported in this paper.
Acknowledgements
We are grateful for comments from William Megginson, Iftekhar Hasan, Steven Ongena, Larry D. Wall, Daniel Wolfenzon, Ronald Anderson, Christophe J. Godlewski, Radic Nemanja, Lisa Yang, Pinar Uysal, Josep A. Tribó, Patrick McColgan, Tobias Basse, Simon Glossner, Giorgio Zanarone, Diego Rodríguez-Palenzuela, Ana I. Fernández and Antoni Garrido, as well as conference participants at the 2018 EFMA Annual Meeting in Milan, 2018 FMA Asia-Pacific Conference in Hong Kong, 8th FEBS Conference in Rome
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