Form or Substance? Incomplete Disambiguation of Credit Grades in Syndicated Bank Loans

Corporate credit ratings have tightened gradually but substantially over two decades. We ex- amine whether syndicated loans correct for the conservatism. We find that they do not. The correction in spreads is greater for smaller, speculative borrowers, loans with fewer lenders and a greater lead bank share that resemble single lender loans, for borrower names with CDS, and in the CDS markets. The incomplete correction is also detectable in newly rated borrowers who did not earlier have ratings. Thus, even in markets with large sophisticated players, form rather than substance matters.