Does amortization matter? Evidence from the syndicated loan market

In this article, I investigate whether a firm's decision to adopt an amortizing payment schedule affects its cost of bank loans. Focusing on US syndicated loans from 1991 to 2018, I find that amortized loans on average have spreads that are 46 basis points lower than bullet unamortized loan facilities. This discount represents a decrease of $1.66 million in annual interest expenses. I also find that borrowers with higher fundamental volatility, debt rollover risk, or financial constraints enjoy a substantially larger amortization discount and stand a better chance of refinancing their loan debt. However, the discount on loan pricing is moderated if nonbank institutions such as hedge funds or collateralized loan obligations participate in the lending syndicate. My results remain robust when I measure the intensity of loan amortization, control for overall debt maturity profiles, and address the endogeneity issue with propensity score matching and within-loan analyses. Overall, my article supports the liquidity risk hypothesis, which suggests that borrowing firms have incentives to spread loan payments across time to diversify their debt maturity structure and enhance the prospects of debt refinancing, thereby limiting the transmission of liquidity risk to credit risk.