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SYNDICATE STRUCTURE AS A RESPONSE TO POLITICAL RISK IN THE PROJECT FINANCE LOAN MARKET

This paper examines how political risk affects the structure of project finance (PF) loan syndicates. Using a sample of 495 loan tranches worth $151 billion, we document high levels of debt ownership concentration: the largest single bank holds 20.3% while the top five banks collectively hold 61.2% of a typical PF loan tranche. We show that both syndicate size and concentration are functions of political risk. As country risk increases, debt concentration initially declines, but later increases in high-risk countries, creating what we call a syndicate “smile.” In contrast to LaPorta et al (1998), who find that equity ownership and shareholder rights are substitutes, we show that debt ownership and creditor rights are complements. Finally, we show that loan pricing is a positive function of syndicate size and concentration. Viewed collectively, these results are consistent with bank syndicates providing, and charging for, valuable monitoring, deterrence, and recontracting services. On a more theoretical level, the results illustrate the continuous nature of debt ownership and refute the overly simplistic distinction between single bank creditors and atomistic bondholders commonly described in the literature.