An important characteristic of syndicated loans is that they are floating rate instruments, priced at a fixed spread to Libor (the London interbank offered rate). In an environment where interest rates may be expected to rise, this characteristic may partly explain such strong investor interest. To assess the potential financial stability ramifications of these developments, we have focused initially on two key questions.
First, to what degree would financial intermediaries be exposed to a rapid change in investor sentiment? Recall that prior to the financial crisis, a number of important financial institutions, in their role as lead arrangers of syndicated loans, amassed significant “pipelines” of very large deals, which effectively represented commitments to provide financing.