Research / BFI Working PaperDec 01, 2020

Secured Credit Spreads and the Issuance of Secured Debt

Efraim Benmelech, Nitish Kumar, Raghuram Rajan

We show that after accounting for selection, credit spreads for secured debt issuances are lower than for unsecured debt issuances, especially when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. Yet firms tend to be reluctant to issue secured debt when other forms of financing are available, as we demonstrate with an analysis of security issuance over time and in particular around the COVID-19 pandemic shock in the United States in early 2020. We find that for firms that are rated non-investment grade and that have few alternative sources of financing in difficult times, the likelihood of secured debt issuance is positively correlated with the spread between traded unsecured and secured bonds. It is not correlated for firms that are investment grade. This pattern of issue behavior is consistent with theories that see collateral as a form of insurance, to be used only in extremis.

More Research From These Scholars

BFI Working Paper Aug 11, 2021

The Relationship Dilemma: Why Do Banks Differ in the Pace at Which They Adopt New Technology?

Prachi Mishra, Nagpurnanand Prabhala, Raghuram Rajan
Topics:  Technology & Innovation
BFI Working Paper Mar 16, 2023

Liquidity Dependence and the Waxing and Waning of Central Bank Balance Sheets

Viral V. Acharya, Rahul S. Chauhan, Raghuram Rajan, Sascha Steffen
Topics:  Monetary Policy