Does Borrowing from Banks Cost More than Borrowing from the Market?

62 Pages Posted: 27 Oct 2017 Last revised: 20 Aug 2019

Date Written: August 20, 2019

Abstract

This paper investigates the pricing of bank loans relative to capital market debt. The analysis uses a novel sample of loans matched with bond spreads from the same firm on the same date. After accounting for seniority, lenders earn a large premium relative to the bond-implied credit spread. In a sample of secured term loans to noninvestment-grade firms, the average premium is 140 to 170 bps or about half of the all-in-drawn spread. This is the first direct evidence of firms' willingness to pay for bank credit and raises questions about the nature of competition in the loan market.

Keywords: credit spreads, syndicated loans, corporate bonds, banking

JEL Classification: G12, G21, G32

Suggested Citation

Schwert, Michael, Does Borrowing from Banks Cost More than Borrowing from the Market? (August 20, 2019). Journal of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3059607 or http://dx.doi.org/10.2139/ssrn.3059607

Michael Schwert (Contact Author)

AQR Arbitrage, LLC ( email )

Two Greenwich Plaza
Greenwich, CT 06830
United States
2037423005 (Phone)

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