The systemic risk of leveraged and covenant-lite loan syndications

A. Sina, Monica Billio, Alfonso Dufour, F. Rocciolo and S. Varotto

International Review of Financial Analysis, 2025, vol. 97, issue C

Abstract: By modelling the whole U.S. syndicated loan market as a financial network from 2000 to 2022, we find that highly connected institutions hold significant shares of leveraged and covenant-lite loans. Our analysis indicates that the size of leveraged and covenant-lite syndicated loan portfolios increases financial institutions' systemic risk, particularly during recession periods. Although banks commonly sell syndicated loans shortly after origination, our results suggest that they remain vulnerable to pipeline risk. Our study has significant implications for policymakers and regulators, as it can aid in identifying banks exposed to systemic risk associated with leveraged and covenant-lite loans and in ranking systemically important financial institutions accordingly.

Keywords: Leveraged loans; Covenant-lite loans; Loan syndication; Systemic risk; Financial networks (search for similar items in EconPapers)
JEL-codes: C45 G21 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:97:y:2025:i:c:s1057521924006707

DOI: 10.1016/j.irfa.2024.103738

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