Working Paper: NBER ID: w25467
Authors: Robert Prilmeier; Ren M. Stulz
Abstract: In contrast to bonds, cov-lite loans do not require SEC registration and are not subject to securities laws. We show that this distinction plays an important role in firms’ choice between funding through cov-lite loans and bonds and helps understand why the market share of cov-lite loans has been so high in recent normal times. Compared to cov-heavy loans, cov-lite loans are closer substitutes for bonds in that they have similar covenants, have tighter bid-ask spreads, have more trading, and are more likely to be used to refinance bonds than cov-heavy loans.\n
Keywords: Cov-lite loans; Bonds; Bank monitoring; Securities laws
JEL Codes: D82; G18; G23; G32
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| legal status of covlite loans (H81) | firms' decisions to choose covlite loans over bonds (G32) |
| perceived legal obligations of bond issuance (H74) | firms' likelihood to opt for covlite loans (G32) |
| legal status (K37) | loan structuring to resemble bonds (G32) |
| covlite loans (G51) | likelihood of firms being public firms (G32) |
| covlite loans (G51) | likelihood of firms exiting public markets (G32) |
| covlite loans (G51) | preference for covlite loans over covheavy loans or bonds (G51) |
| structural features of covlite loans (G51) | perceived risk (D81) |
| perceived risk (D81) | credit spreads of covlite loans (G19) |