Zombies in the Syndicated Bank Loan Market: Credit Lines versus Term Loans

I document evidence of a potential pitfall of syndicated bank lending that emerges from the aggressive exercise of lines of credit by nonviable zombie firms. Consistent with a nuanced version of Hu and Varas (Journal of Finance 2021) theory, privately informed relationship banks enable zombie firms to build a facade of creditworthiness by allowing aggressive usage of credit lines and restricting amendments that would otherwise signal technical default. After the reputation-building stage, banks exit these loans by shifting credit risk to non-bank participants in term syndicated bank loans, rather than publicly traded bonds, with the exception of the COVID-19 pandemic period.