The secured credit premium and the issuance of secured debt

Efraim Benmelech; Nitish Kumar; Raghuram Rajan

doi:10.1016/j.jfineco.2022.06.005

The secured credit premium and the issuance of secured debt

Efraim Benmelech^*, Nitish Kumar, Raghuram Rajan

^*Corresponding author for this work

Finance

Research output: Contribution to journal › Article › peer-review

14 Scopus citations

Abstract

Credit spreads for secured debt are lower than for unsecured debt, especially when a firm's credit quality deteriorates, the economy slows, or average credit spreads widen. Yet investment-grade firms tend to be reluctant to issue secured debt at all times. In contrast, we find that for firms that are rated below investment grade, the likelihood of secured debt issuance increases as firm credit quality deteriorates, the economy slows, or average credit spreads widen. This differential pattern of issue behavior is consistent with highly rated firms seeing unencumbered collateral as a form of insurance, to be used only in extremis.

Original language	English (US)
Pages (from-to)	143-171
Number of pages	29
Journal	Journal of Financial Economics
Volume	146
Issue number	1
DOIs	https://doi.org/10.1016/j.jfineco.2022.06.005
State	Published - Oct 2022

Keywords

Business cycles
Collateral
Credit spreads
Secured debt

ASJC Scopus subject areas

Accounting
Finance
Economics and Econometrics
Strategy and Management

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10.1016/j.jfineco.2022.06.005

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title = "The secured credit premium and the issuance of secured debt",

abstract = "Credit spreads for secured debt are lower than for unsecured debt, especially when a firm's credit quality deteriorates, the economy slows, or average credit spreads widen. Yet investment-grade firms tend to be reluctant to issue secured debt at all times. In contrast, we find that for firms that are rated below investment grade, the likelihood of secured debt issuance increases as firm credit quality deteriorates, the economy slows, or average credit spreads widen. This differential pattern of issue behavior is consistent with highly rated firms seeing unencumbered collateral as a form of insurance, to be used only in extremis.",

keywords = "Business cycles, Collateral, Credit spreads, Secured debt",

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AU - Kumar, Nitish

AU - Rajan, Raghuram

PY - 2022/10

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N2 - Credit spreads for secured debt are lower than for unsecured debt, especially when a firm's credit quality deteriorates, the economy slows, or average credit spreads widen. Yet investment-grade firms tend to be reluctant to issue secured debt at all times. In contrast, we find that for firms that are rated below investment grade, the likelihood of secured debt issuance increases as firm credit quality deteriorates, the economy slows, or average credit spreads widen. This differential pattern of issue behavior is consistent with highly rated firms seeing unencumbered collateral as a form of insurance, to be used only in extremis.

AB - Credit spreads for secured debt are lower than for unsecured debt, especially when a firm's credit quality deteriorates, the economy slows, or average credit spreads widen. Yet investment-grade firms tend to be reluctant to issue secured debt at all times. In contrast, we find that for firms that are rated below investment grade, the likelihood of secured debt issuance increases as firm credit quality deteriorates, the economy slows, or average credit spreads widen. This differential pattern of issue behavior is consistent with highly rated firms seeing unencumbered collateral as a form of insurance, to be used only in extremis.

KW - Business cycles

KW - Collateral

KW - Credit spreads

KW - Secured debt

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The secured credit premium and the issuance of secured debt

Abstract

Keywords

ASJC Scopus subject areas

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