Working Paper: NBER ID: w26799
Authors: Efraim Benmelech; Nitish Kumar; Raghuram Rajan
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.
Keywords: secured debt; credit premium; investment grade firms; below-investment grade firms
JEL Codes: E44; E51; G21; G23; G33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| secured credit spreads (G12) | unsecured credit spreads (G12) |
| firm's credit quality deteriorates (G33) | likelihood of secured debt issuance (G33) |
| secured premium (G12) | investment-grade firms (G32) |