Developing country economic structure and the pricing of syndicated credits

BIS Working Papers No 132
July 2003
We analyse in an extensive risk return framework the determinants of the pricing of 5,000-plus syndicated credits granted to developing country borrowers between 1993 and 2001. Syndicated loans with riskier characteristics or granted to riskier borrowers are found to be more expensive than others, although the effect of purely microeconomic price determinants is in several instances weaker when macroeconomic conditions in borrowers' countries are also controlled for. In addition to individual loan or borrower considerations, lenders seem to focus more on macroeconomic factors to determine the pricing of their loans, such as the level of exports relative to debt service in the developing countries where the borrowers are located. For some, this means restricted access to external financing. We detect possible evidence of lenders exploiting their market power. Certain banks appear to charge a premium to change initially agreed loan terms. Furthermore, discounts are granted on developing country loans provided by small groups or clubs of relationship banks rather than on facilities with the participation of a large number of institutions.