Leveraged Loans: Is High Leverage Risk Priced in?
58 Pages Posted: 3 Dec 2020 Last revised: 4 Apr 2022
Date Written: December 1, 2020
We investigate the impact of the 2014 Interagency Clarification on the leverage risk premium for bank- and nonbank-originated loans. Using a novel dataset from 2011 to 2019, we show that leveraged loan spreads have declined rapidly for nonbank facilities relative to bank facilities since the introduction of the 2014 Interagency Clarification. The decline in leveraged loan spreads is significant for highly leveraged borrowers, especially when term loans are involved. We further demonstrate that a higher degree of information asymmetry, driven by an increase in covenant-lite loan issuance and weaker investor protection, is strongly associated with a narrower leverage risk premium.
Keywords: Leverage Risk, Syndicated Loan Pricing, Leveraged Loan, Information Asymmetry
JEL Classification: G21, D82, G34
Suggested Citation: Suggested Citation