Leveraged Loans: Is High Leverage Risk Priced in?

David Newton, Steven Ongena, Ru Xie and Binru Zhao ()
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David Newton: University of Bath - School of Management
Ru Xie: University of Bath, School of management

No 20-111, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: The economic downturn caused by the Covid-19 pandemic accentuates extant concerns about the leveraged loan market. Using a novel dataset, we show that leveraged loan spreads have declined for nonbank-facilities since the introduction of the Interagency Guidance on Leveraged Lending (IGLL) and the ensuing “frequently asked questions for implementing the March 2013 guidance”. The decline in leveraged loan spreads is significant for highly leveraged borrowers, especially when involving term loans. We further demonstrate that risk shifting issues associated with the high level of Collateralized Loan Obligations issuance strongly explain the decline of nonbank leveraged loan spreads. In addition, a higher degree of information asymmetry, driven by an increase in covenant-lite loan issuance and weaker investor protection, are strongly associated with the narrowed leverage risk premium.

Keywords: Leverage Risk; Syndicated Loan Pricing; Leveraged Loan; Risk Shifting (search for similar items in EconPapers)
JEL-codes: D82 G21 G34 (search for similar items in EconPapers)
Pages: 44 pages
Date: 2020-12
New Economics Papers: this item is included in nep-ban, nep-cfn and nep-rmg
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Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp20111

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