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
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: Suggested Citation