Default Rates in the Syndicated Bank Loan Market: A Mortality Analysis

Abstract

The most fundamental aspect of credit risk models is the rating of the underlying assets and the associated expected and unexpected migration patterns. The most important migration is to default. While default rate empirical studies of corporate bonds are now commonplace, there has never been a study on the corporate bank loan market. This paper assesses, for the first time, the default rate experience on large, syndicated bank loans. The results are stratified by original loan rating using a mortality rate framework for the 1991-1996 period. We find that the mortality rates on bank loan are remarkably similar to that of corporate bonds and asses the bias in the magnitude of our findings given that the study period covered a benign credit cycle in the United States. Our results provide important new information for assessing the risk of corporate loans not only for bankers but also mutual fund investors and analysts of structured financial products, credit derivatives and credit issuance.