A comparative analysis of ex ante credit spreads: Structured finance versus straight debt finance

Abstract

Structured finance (SF)project finance (PF) loans and asset securitization (AS) bondsand straight debt finance (SDF)corporate bonds (CB)transactions are priced in segmented capital markets. Credit spreads are higher for PF loans than they are for AS and CB issues. SF and SDF credit spreads are directly related to default and currency risks, while the slope of the yield curve impacts negatively the credit spreads. The loan to value ratio proves positively related to PF loans and negatively related to AS bonds, while the number of banks has a negative impact on the credit spread for AS and CB issues. PF loan credit spreads and fees are shown to be complements rather than supplements. Borrowers from the U.K. raise funds in PF and CB markets at a higher credit spread and the impact of country risk on the credit spread is positive for PF and CB issues. The 2007/2008 financial crisis have imposed a significant impact on credit spreads. The average credit spread has increased 329.1 bps for PF loans, 206.5 bps for AS bonds, and 220.3 bps for CB issues during the crisis period. Finally, a robust hump-shaped relationship between credit spread and maturity is found for PF loans while a linear positive relationship remains strongly significant for CB.

The CSPP impact on non-financial firms’ cost of borrowing and debt choice

“…Following the logic established in earlier studies (Campbell and Taksler, 2003;Carey and Nini, 2007;Chen et al, 2007;Bae and Goyal, 2009;Maskara, 2010;Bharath et al, 2011;Lin et al, 2011;Mattes et al, 2013;Lim et al, 2014;Marques and Pinto, 2020) A positive relationship is expected between maturity and both the spread and the probability of choosing bonds over loans, due to the accrued risk of longer redemption horizons (Marshall et al, 2016;Zaghini, 2019). Regarding the transaction size, we expect larger deals to have lower spreads as they typically have, ceteris paribus, lower uncertainty and higher liquidity compared to smaller deals Chen et al, 2007;Zaghini, 2019).…”

“…To assess the impact of the CSPP on bond and loan primary market spreads, we use the model described in Eq. ( 1), a reduced-form model similar to existing loan and bond pricing models (Campbell and Taksler, 2003;Chen et al, 2007;Zaghini, 2019;Marques and Pinto, 2020;Alves et al, 2021). We employ OLS regression techniques and adjust for heteroskedasticity.…”

“…Extant literature on debt pricing presents market variables, like the slope of the yield curve, market volatility, the sovereign risk, and financial crises, which have a significant impact on bond and loan spreads (Kleimeier and Megginson, 2000;Campbell and Taksler, 2003;Krishnan et al, 2005;Qian and Strahan, 2007;Bae and Goyal, 2009;Lin et al, 2011;Marques and Pinto, 2020;Alves et al, 2021).…”

“…We begin our analysis by examining the impact of the CSPP on credit spreads, making use of a reduced-form model, along the lines of existing pricing models for corporate bonds and loans (e.g., Campbell and Taksler, 2003;Chen et al, 2007;Marques and Pinto, 2020), at both tranche and deal level. The results indicate that there has been a significant reduction in corporate bond spreads due to the CSPP, with the implementation period strengthening the reduction in spreads verified during the announcement period, still with a weaker impact.…”

Firm Life Cycle and Cost of Debt

“…Even if uncontrolled differences in risk exist across firms' life cycles, markets may not fully account for differences between life cycle phases (Dickinson 2011;Cantrell and Dickinson 2020;Vorst and Yohn 2018). Lenders are not always compensated for differences in systematic risk (Marques and Pinto 2020). For these reasons, we state our formal hypothesis in the null form.…”