Secured Credit Spreads and the Issuance of Secured Debt

57 Pages Posted: 2 Mar 2020 Last revised: 3 Dec 2020

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

We show that after accounting for selection, credit spreads for secured debt issuances are lower than for unsecured debt issuances, especially when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. Yet firms tend to be reluctant to issue secured debt when other forms of financing are available, as we demonstrate with an analysis of security issuance over time and in particular around the COVID-19 pandemic shock in the United States in early 2020. We find that for firms that are rated non-investment grade and that have few alternative sources of financing in difficult times, the likelihood of secured debt issuance is positively correlated with the spread between traded unsecured and secured bonds. It is not correlated for firms that are investment grade. This pattern of issue behavior is consistent with theories that see 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., Secured Credit Spreads 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
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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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