Collateral pricing

Efraim Benmelech, Nittai K. Bergman*

*Corresponding author for this work

Research output: Contribution to journalArticle

84 Citations (Scopus)

Abstract

We examine how collateral affects the cost of debt capital. Using a novel data set of secured debt issued by U.S. airlines, we construct industry-specific measures of collateral redeployability. We show that debt tranches that are secured by more redeployable collateral exhibit lower credit spreads, higher credit ratings, and higher loan-to-value ratios-an effect which our estimates show to be economically sizeable. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing and increases debt capacity.

Original languageEnglish (US)
Pages (from-to)339-360
Number of pages22
JournalJournal of Financial Economics
Volume91
Issue number3
DOIs
StatePublished - Mar 1 2009

Fingerprint

Pricing
Debt
Loans
Industry
Costs
Airlines
Cost of debt
External financing
Credit spreads
Credit rating
Debt capacity

Keywords

  • Airlines
  • Collateral
  • Collateralized debt obligations
  • Liquidation
  • Redeployability

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

Cite this

Benmelech, Efraim ; Bergman, Nittai K. / Collateral pricing. In: Journal of Financial Economics. 2009 ; Vol. 91, No. 3. pp. 339-360.
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Collateral pricing. / Benmelech, Efraim; Bergman, Nittai K.

In: Journal of Financial Economics, Vol. 91, No. 3, 01.03.2009, p. 339-360.

Research output: Contribution to journalArticle

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AB - We examine how collateral affects the cost of debt capital. Using a novel data set of secured debt issued by U.S. airlines, we construct industry-specific measures of collateral redeployability. We show that debt tranches that are secured by more redeployable collateral exhibit lower credit spreads, higher credit ratings, and higher loan-to-value ratios-an effect which our estimates show to be economically sizeable. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing and increases debt capacity.

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