Does Borrowing from Banks Cost More than Borrowing from the Market?
60 Pages Posted: 21 May 2018
Date Written: May 12, 2018
This paper investigates the pricing of bank loans relative to capital market debt. The analysis relies on a novel sample of syndicated loans matched with bond spreads from the same firm on the same date. After accounting for seniority, banks earn an economically large premium relative to the market price of credit risk. To quantify the premium, I apply a structural model that accounts for priority structure, prices the firm's bonds, and matches expected losses given default and secondary market bid-ask spreads. In a sample of secured term loans to non-investment-grade firms, the average loan premium is 143 bps, equal to 43% of the all-in-drawn spread. These findings are the first direct evidence of firms' willingness to pay for the unique qualities of bank loans and raise 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