Does Borrowing from the Private Bond Market Cost More than Borrowing from the Public Bond Market?

76 Pages Posted: 28 Aug 2020

See all articles by Pascal Böni

Pascal Böni

Tilburg University - TIAS School for Business and Society and Tilburg School of Economics and Management

Frans de Roon

Tilburg University - Department of Finance

Philip Joos

Tilburg University

Date Written: August 23, 2020

Abstract

We investigate the pricing of private versus public placement bonds, using a novel data set, and test the effect of covenants on yield spreads in the primary market. The observed yield spread premium of 116 basis points is partially explained by credit risk but equally important, by the use of covenants. We provide evidence of a U-shape effect of covenant intensity on spread, the downward sloping part explained by investment covenants, the upward sloping part by financing covenants. The use of covenants has as much explanatory power beyond credit risk as liquidity and market conditions together, providing direct evidence of firm’s willingness to pay for options providing renegotiation flexibility.

Keywords: bond, pricing, asset pricing, private placement, covenants, renegotiation, agency theory

JEL Classification: G12, G15

Suggested Citation

Böni, Pascal and de Roon, Frans A. and Joos, Philip, Does Borrowing from the Private Bond Market Cost More than Borrowing from the Public Bond Market? (August 23, 2020). Available at SSRN: https://ssrn.com/abstract=3680011 or http://dx.doi.org/10.2139/ssrn.3680011

Pascal Böni (Contact Author)

Tilburg University - TIAS School for Business and Society and Tilburg School of Economics and Management ( email )

Warandelaan 2
TIAS Building
Tilburg, Noord Brabant 5037 AB
Netherlands

Frans A. De Roon

Tilburg University - Department of Finance ( email )

P.O. Box 90153
Tilburg, 5000 LE
Netherlands
+31 1 3466 8361/3025 (Phone)
+31 1 3466 2875 (Fax)

Philip Joos

Tilburg University ( email )

School of Economics and Management
Warandelaan 2
Tilburg, 5000 LE
Netherlands
31 13 4668716 (Phone)
31 13 4668001 (Fax)

HOME PAGE: http://www.tilburguniversity.edu/webwijs/show/philjoos/

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