Default rates in the syndicated bank loan market: A mortality analysis

The most fundamental aspect of credit risk models is the rating of the unde rlying 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 stud y on the default rate in the corporate bank loan market. This paper assesse s, for the first time, the default rate experience on large, syndicated ban k loans. The results are stratified by original loan rating using a mortali ty rate framework for the 1991-1996 period. We find that the mortality rate s on bank loans are remarkably similar to that of corporate bonds when meas ured cumulatively over the five-year period after issuance, but loan defaul t rates appear to be considerably higher than bonds for the first two years after issuance. Since loans have an average effective maturity of under tw o years, this shorter maturity difference is of considerable relevance, esp ecially if confirmed when our database will cover a longer sample period an d more actual defaults. We do attempt to estimate the impact and bias on ou r results of the study's sample period which only covers the recent benign credit cycle in the US. Our results provide important new information for a ssessing the risk of corporate loans not only for bankers but also mutual f und investors and analysts of structured financial products, credit derivat ives and credit insurance. (C) 2000 Elsevier Science B.V. All rights reserv ed. JEL classification: G33; G21; G3.