Research Details

Abstract

Lenders are unwilling to accept lower credit spreads for secured debt relative to unsecured debt when a firm is healthy. However, they accept significantly lower credit spreads for secured debt when a firm’s credit quality deteriorates, the economy slows, or average credit spreads widen. This contingent valuation of collateral or security, coupled with the borrower perceiving a loss of operational and financial flexibility when issuing secured debt, may explain why firms issue secured debt on a contingent basis; they issue more when their credit quality deteriorates, the economy slows, and average credit spreads widen.

Type

Working Paper

Author(s)

Efraim Benmelech, Nitish Kumar, Raghuram Rajan

Date Published

2020

Citations

Benmelech, Efraim, Nitish Kumar, and Raghuram Rajan. 2020. Secured Credit Spreads.

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