Tranching in the syndicated loan market around the world

Loan tranching allows banks to manage risk and facilitate firm financing, which
may be essential for firms that cannot access investors from stock markets. We
analyze the determinants and benefits of loan tranching by pooling the
tranches of individual loans to create the largest cross-country sample of
syndicated loans, covering more than 150,000 loans from multinational and
domestic firms. We find that, in addition to market, deal, and borrower
characteristics, legal and institutional differences impact loan tranching. Strong
creditor protection and efficient debt collection increase the probability of
tranching and reduce tranche spreads, ultimately promoting firms’ access to
debt. We also find evidence that tranching facilitates the financing of
multinational firms abroad due to the transfer of legal and cultural
institutions to foreign subsidiaries. Overall, our results suggest that tranching
plays an important role in reducing a country’s financial development gap and
promotes firms’ access to debt.