Leveraged Loans: Is High Leverage Risk Priced in?

58 Pages Posted: 3 Dec 2020 Last revised: 4 Apr 2022

See all articles by David Newton

David Newton

University of Bath - School of Management

Steven Ongena

University of Zurich - Department of Banking and Finance; Swiss Finance Institute; KU Leuven; NTNU Business School; Centre for Economic Policy Research (CEPR)

Ru Xie

University of Bath, School of management

Binru Zhao

University of Bath - School of Management

Date Written: December 1, 2020

Abstract

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

Newton, David and Ongena, Steven R. G. and Xie, Ru and Zhao, Binru, Leveraged Loans: Is High Leverage Risk Priced in? (December 1, 2020). Swiss Finance Institute Research Paper No. 20-111, Available at SSRN: https://ssrn.com/abstract=3741693 or http://dx.doi.org/10.2139/ssrn.3741693

David Newton

University of Bath - School of Management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Steven R. G. Ongena

University of Zurich - Department of Banking and Finance ( email )

Schönberggasse 1
Zürich, 8001
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

KU Leuven ( email )

Oude Markt 13
Leuven, Vlaams-Brabant 3000
Belgium

NTNU Business School ( email )

Norway

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Ru Xie (Contact Author)

University of Bath, School of management ( email )

Claverton Down
Bath, BA2 7AY
United Kingdom

Binru Zhao

University of Bath - School of Management

Claverton Down
Bath, BA2 7AY
United Kingdom

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