Working Paper: NBER ID: w13874
Authors: Efraim Benmelech; Nittai K. Bergman
Abstract: We examine how collateral affects the cost of debt capital. Theories based on borrower moral hazard and limited pledgeable income predict that collateral increases the availability of credit and reduces its price. Testing these theories is complicated by the very selection problem which they imply: creditors will demand collateral precisely from those borrowers who are riskier. This selection problem leads to a positive relation in the data between the presence of collateral and the loan yield. Analyzing the extensive margin of collateral use, therefore, masks the hypothesized negative impact that collateral exhibits on debt yields. In this paper, we alleviate this problem by focusing on a particular industry and examining its intensive, rather than extensive, margin of collateral use. Using a novel data set of secured debt issued by U.S. airlines, we construct industry-specific measures of collateral redeployability. We show that debt tranches that are secured by more redeployable collateral exhibit lower credit spreads, higher credit ratings, and higher loan-to-value ratios -- an effect which our estimates show to be economically sizeable. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing and increases debt capacity.
Keywords: collateral; debt capital; credit spreads; airlines
JEL Codes: G12; G24; G32; G33; L93
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| higher collateral redeployability (H56) | lower credit spreads (G19) |
| higher collateral redeployability (H56) | better credit ratings (G51) |
| higher collateral redeployability (H56) | higher loan-to-value ratios (G21) |
| higher collateral redeployability (H56) | mitigates financial frictions (G59) |
| collateral characteristics (C10) | debt pricing (G12) |
| selection bias (C24) | correlation between redeployability measures and airline risk (L93) |