The Secured Credit Premium and the Issuance of Secured Debt

Efraim Benmelech, Nitish Kumar and Raghuram Rajan

No 26799, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Credit spreads for secured debt are lower than for unsecured debt, especially when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. Yet investment grade firms tend to be reluctant to issue secured debt at all times. In contrast, we find that for firms that are rated below-investment grade, the likelihood of secured debt issuance increases as firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. This differential pattern of issue behavior is consistent with highly rated firms seeing unencumbered collateral as a form of insurance, to be used only in extremis.

JEL-codes: E44 E51 G21 G23 G33 (search for similar items in EconPapers)
Date: 2020-02
New Economics Papers: this item is included in nep-bec and nep-mac
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Published as Efraim Benmelech & Nitish Kumar & Raghuram Rajan, 2022. "The secured credit premium and the issuance of secured debt," Journal of Financial Economics, vol 146(1), pages 143-171.

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