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Privately Placed Debt on Life Insurers’ Balance Sheets: Part 1—A Primer
Life insurers buy long-term assets to match their long-term liabilities and hence are among the largest investors in corporate bonds.1 Over the past decade, insurance companies have shifted their corporate bond investments toward privately placed bonds (private placements). A private placement is an unregistered security that is sold to a limited pool of investors, primarily institutional investors, such as investment banks, pension funds, and insurers. While privately placed bonds accounted for 13% of life insurers’ bond investments in 2004, they accounted for over 20% in 2022 (figure 1).
Discussion Paper
Off-Balance Sheet Items of Depository Institutions in the Enhanced Financial Accounts
The Enhanced Financial Accounts initiative is an ambitious, long-term effort to augment the Financial Accounts of the United States with a more detailed picture of financial intermediation in the United States. This Note describes one initial project to provide more detailed information on the holdings and activities of depository institutions.
Working Paper
Pipeline Risk in Leveraged Loan Syndication
Leveraged term loans are typically arranged by banks but distributed to institutional investors. Using novel data, we find that to elicit investors' willingness to pay, arrangers expose themselves to pipeline risk: They have to retain larger shares when investors are willing to pay less than expected. We argue that the retention of such problematic loans creates a debt overhang problem. Consistent with this, we find that the materialization of pipeline risk for an arranger reduces its subsequent arranging and lending activity. Aggregate time series exhibit a similar pattern, which suggests ...
Working Paper
The Dollar and Corporate Borrowing Costs
We show that U.S. dollar movements affect syndicated loan terms for U.S. borrowers, even for those without trade exposure. We identify the effect of dollar movements using spread and loan amount adjustments during the syndication process. Using this high-frequency, within loan variation, we find that a one standard deviation increase in the dollar index increases spreads by up to 15 basis points and reduces loan amounts and underpricing by up to 2 percent and 7 basis points, respectively. These effects are concentrated in dollar appreciations. Our results suggest that global factors reflected ...
Working Paper
Credit line use and availability in the financial crisis: the importance of hedging
What determined the corporate use of credit lines in the recent financial crisis? To address this question we hand-collect data on credit lines and interest rate hedging for a random sample of 600 COMPUSTAT firms. We document that drawdowns of credit lines had already increased in 2007, earlier than what previous work has found. The surge in drawdowns occurred precisely when disruptions in bank funding markets began. In addition, we distinguish unused and available portions of credit lines, which we then use to disentangle credit supply and credit demand effects. On the supply side, we find ...
Newsletter
How central bank swap lines affect the leveraged loan market
The cost of borrowing U.S. dollars through foreign exchange (FX) swap markets increased significantly at the beginning of the Covid-19 pandemic in February 2020, indicated by larger deviations from covered interest rate parity (CIP). CIP deviations narrowed again when the Federal Reserve expanded its swap lines to support U.S. dollar liquidity globally—by enhancing and extending its swap facility with foreign central banks and introducing the new temporary Foreign and International Monetary Authorities (FIMA) repurchase agreement facility for foreign and international monetary authorities. ...
Working Paper
The Real Effects of Credit Line Drawdowns
Do firms use credit line drawdowns to finance investment? Using a unique dataset of 467 COMPUSTAT firms with credit lines, we study the purpose of drawdowns during the 2007-2009 financial crisis. Our data show that credit line drawdowns had already increased in 2007, precisely when disruptions in bank funding markets began to squeeze aggregate liquidity. Consistent with theory, our results confirm that firms use drawdowns to sustain investment after an idiosyncratic liquidity shock. Using an instrumental variable approach based on institutional features of credit line contracts, we find that ...
Discussion Paper
The Federal Reserve's Overnight and Term Reverse Repurchase Agreement Operations in the Financial Accounts of the United States
This note explains how the Federal Reserve's overnight and term reverse repurchase agreement (RRP) operations are reported in the Federal Reserve's Financial Accounts of the United States (formerly known as the Flow of Funds Accounts).
Working Paper
Verifying the state of financing constraints: evidence from U.S. business credit contracts
Which of the strategies for financing constraints in economic models is the most empirically plausible? This paper tests two commonly used models of financing constraints, costly state verification (Townsend, 1979) and moral hazard (Holmstrom and Tirole, 1997), using a comprehensive data set of US small business credit contracts. The data include detailed information about the business, its owner, bank balance sheet information, and the terms of credit. In line with the predictions of models of financing constraints, I find that an additional dollar of net worth accounts for about 30 cents of ...
Discussion Paper
Auto Financing During and After the Great Recession
More than half of auto financing is originated by non-bank finance companies that typically rely on short-term funding markets for their own financing. During the recent financial crisis, disruptions in these short-term financing markets reduced the availability of auto credit to consumers, which contributed to the decline in auto sales.