Syndicated loans get cheaper (much cheaper) during the fall and in the spring, so start your shopping now.
What if you could get a double-digit basis point discount off your $100 million dollar credit line simply by approaching your banker around Halloween rather than the July 4 holiday?
Although it may sound too good to be true, new research says that “seasonality” is a major factor in corporate lending, and that borrowers could save as much as 19 basis points on a syndicated line if they simply time their credit needs to the cheaper months.
“When we started this research I was sure this couldn’t be true,” says Mitchell Petersen, professor of finance at the Kellogg School of Management at Northwestern University. “However, the results are pretty clear and we were quite surprised.”
Like a credit market “Big Foot,” seasonality in syndicated loan prices is something that has been discussed by bankers and big borrowers but rarely documented. But the new research shows there is “predictable seasonal variation, both in interest rates and the volume of new loans” that creates significant price and volume swings in the market.
In fact, the paper reveals firms borrowing during seasonal “sales” in late spring and fall (May/June and October) issue at 19 basis points cheaper and raise 50 percent more total funding than winter and summer borrowers (January/February and August).
“The patterns we’ve documented of recurring periods of significant markups and discounts in the market for corporate debt raise questions about both the dynamic nature of borrower demand,” the research posits, which was co-authored by Yale University professor Justin Murfin.
What is the reason for the season swing? Vacations.
The research says that since syndicated loan staff are out of the office around winter and summer vacation schedules, they are apt to “[price] bids on new deals less aggressively to preserve family vacations.” Put another way, the paper likens firms approaching banks for a syndicated credit line in the summer and winter as paying “the plumber’s Sunday service charge.”
Petersen adds although not all corporate borrowers will see the same discount on credit lines during the cheaper months (as much as 8 to 9 basis points could be adjusted for credit quality) the seasonal price swings remain striking.
“At some level everyone is aware of it, but not everyone can take advantage of it,” Petersen explains. He adds that lower credit quality corporate borrowers are often forced to round up a syndicated loan when “needed,” while higher quality borrowers can shop for loans during the “sales season” and to store up on cheap credit lines, such a commercial back-up facilities.•