Demand and Supply of Syndicated Bank Loans In 1998, the Syndicated Bank Loan market (defined as loans having more than two bank lenders) was a vast and cheap source of debt financing for U.S. corporations. This market was characterized by a large number of financial institutions that aggressively committed capital to debt issuers as a way to build market share and increase earnings.
Over the next three years, however, syndicated loan prices increased dramatically while the quantity of these loans declined. The price increase, measured as a markup over the cost of funds or LIBOR (London Interbank Offered Rate), is illustrated in the figure labeled “All-In Drawn Pricing.” For example, the price to BBB-rated companies rose from 37.5 basis points in 1998 to approximately 129 basis points in 2002. This is a 244% increase in the price or spread. Explain these changes using shifts in demand and/or supply. Over the same time period, in a related lending market, asset-backed commercial paper, we see a huge quantity increase as shown in the “Asset-Backed Commercial Paper” graph.
Did prices for these loans increase or decrease? Justify your answer using shifts in supply and demand curves. All-In Drawn Pricing (Including Usage Fees) 150 1Q98 3Q98 1Q99 3Q99 1Q00 3Q00 1Q01 3Q01 1Q02 8/12/2002 10 30 50 70 90 110 130 BBB+ BBB BBB– BB+ For Broadly Syndicated Loans Maturing in 2–5 Years Based on S&P Senior Debt Ratings 112 SECTION II PRICING, COSTS, AND PROFITS 8-3 Candy Bars Market a. In the accompanying diagram (which represents the market for chocolate candy bars), the initial equilibrium is at the intersection of S1 and D1.
Circle the new equilibrium if there is an increase in cocoa prices. b. In the same diagram, the initial equilibrium is at the intersection of S1 and D1. Circle the new equilibrium if there is rapid economic growth. Price Quantity S2 S1 S3 D3 D1 D2