Has the development of the structured credit market affected the cost of corporate debt?
Abstract: The rapid development of structured credit markets permits investors to assume credit risk that in aggregate is frequently many times larger than the amount of debt actually issued by an underlying borrower. Given the apparent increased appetite for corporate credit risk by investors, and the additional information revealed in the structured credit markets, a natural question to ask is whether the development of these markets has been associated with a reduction in the cost of debt financing, giving firms an opportunity to operate with greater leverage. Using Markit data identifying when trading in credit default swaps begins for each borrower, we fail to find any evidence of that CDS trading has an impact on syndicated loan spreads or non-price terms for the average firm. However, we document evidence that CDS trading helps borrowers issue syndicated loans more frequently and take on more leverage relative to a matched sample of untraded firms, consistent with an increase in credit supply.
Status: Published in Financial innovations and the real economy : a conference (2006, November 16-17)
File(s): File format is application/pdf http://www.frbsf.org/economics/conferences/0611/4_Ashcraft.pdf
Provider: Federal Reserve Bank of San Francisco
Part of Series: Proceedings
Publication Date: 2006