The Secured Credit Premium and the Issuance of Secured Debt

61 Pages Posted: 2 Mar 2020 Last revised: 7 Feb 2022

See all articles by Efraim Benmelech

Efraim Benmelech

Northwestern University - Kellogg School of Management; National Bureau of Economic Research (NBER)

Nitish Kumar

University of Florida

Raghuram G. Rajan

University of Chicago - Booth School of Business; International Monetary Fund (IMF); National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: February 19, 2020

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’s 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: Secured Debt, Credit Spreads, Business Cycle, Distress

JEL Classification: G12, G21, G32

Suggested Citation

Benmelech, Efraim and Kumar, Nitish and Rajan, Raghuram G., The Secured Credit Premium and the Issuance of Secured Debt (February 19, 2020). Available at SSRN: https://ssrn.com/abstract=3541281 or http://dx.doi.org/10.2139/ssrn.3541281

Efraim Benmelech

Northwestern University - Kellogg School of Management ( email )

Evanston, IL 60208
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nitish Kumar (Contact Author)

University of Florida ( email )

Gainesville, FL 32611
United States

Raghuram G. Rajan

University of Chicago - Booth School of Business ( email )

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Chicago, IL 60637
United States
773-702-4437 (Phone)
773-702-0458 (Fax)

International Monetary Fund (IMF) ( email )

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National Bureau of Economic Research (NBER)

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773-702-9299 (Phone)
773-702-0458 (Fax)

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