Secured Credit Spreads

Efraim Benmelech, Nitish Kumar and Raghuram Rajan

No 2020-14, Working Papers from Becker Friedman Institute for Research In Economics

Abstract: Lenders are unwilling to accept lower credit spreads for secured debt relative to unsecured debt when a firm is healthy. However, they accept significantly lower credit spreads for secured debt when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. This contingent valuation of collateral or security, coupled with the borrower perceiving a loss of operational and financial flexibility when issuing secured debt, may explain why firms issue secured debt on a contingent basis; they issue more when their credit quality deteriorates, the economy slows, and average credit spreads widen.

JEL-codes: E44 E51 G21 G23 G33 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2020
New Economics Papers: this item is included in nep-mac
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Citations: View citations in EconPapers (3)

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