The Decline of Secured Debt

Abstract

The share of secured debt issued (as a fraction of total corporate debt) declined steadily in the United States over the twentieth century. This stems partly from financial development giving creditors greater confidence that high quality borrowers will respect their claims even if creditors do not obtain security up front. Consequently, such borrowers prefer retaining financial flexibility by not giving security up front. Instead, security is given contingently -when a firm approaches distress. This also explains why superimposed on the secular decline, the share of secured debt issued is countercyclical.

Two Tales of Debt

“…Our analyses can also shed new light on the nature of secured debt, which is a classic issue in economics research (Berger and Udell, 1990;Donaldson, Gromb, and Piacentino, 2020;Benmelech, Kumar, and Rajan, 2020a;Rampini and Viswanathan, 2020). Although the academic literature typically associates secured debt with debt against separable or tangible assets (i.e., asset-based debt in our categorization), this is not necessarily the case in practice.…”

“…Second, our work connects to research on debt structure, which has covered a number of issues, including loans versus bonds (Denis and Mihov, 2003;Uhlig, 2011, 2015;Crouzet, 2018), interactions among creditors (Bolton and Scharfstein, 1996;Repullo and Suarez, 1998;Park, 2000), secured debt (Donaldson, Gromb, and Piacentino, 2020;Benmelech, Kumar, and Rajan, 2020a), interest rates (Luck and Santos, 2020;Benmelech, Kumar, and Rajan, 2020b), and implications of asset-based and cash flow-based debt (Lian and Ma, 2020;Ivashina, Laeven, and Moral-Benito, 2020). In addition, some early work studies how liquidation costs affect debt choices of firms emerging from bankruptcy (Alderson and Betker, 1995).…”

“…Finally, several studies find that the share of secured debt in total debt is higher for firms with lower ratings (Rauh and Sufi, 2010;Benmelech, Kumar, and Rajan, 2020a).…”

The Role of Collateral in Borrowing

“…Kiyotaki and Moore 1997;Chaney, Sraer and Thesmar 2012;Adelino, Schoar and Severino 2015;Campello and Larrain 2016). Several papers have also shown that lenders become more willing to lend collateralised during downturns (Lian and Ma forthcoming;Liberti and Sturgess 2014;Benmelech et al 2020aBenmelech et al , 2020bDe Jonghe et al 2020). However, it is difficult to analyse the effect of collateralisation on borrowers' access to credit, because available data typically do not permit controlling for endogenous factors.…”

Securities Laws, Bank Monitoring, and the Choice Between Cov-lite Loans and Bonds for Highly Levered

“…Empirically, an important dimension along which cov-lite loans often but not always differ from bonds is that most bonds are unsecured (see Benmelech, Kumar, and Rajan (2020) for the decline of use of collateral in bonds) and cov-lite loans are almost always secured. For borrowers, putting up collateral against borrowing is costly as it reduces financial flexibility (see Benmelech, Kumar, and Rajan (2020) to a given size. When banks are limited in how much of a loan they can hold, they can sell parts of the loan to non-bank investors.…”