Date of Graduation

8-2018

Document Type

Dissertation

Degree Name

Doctor of Philosophy in Business Administration (PhD)

Degree Level

Graduate

Department

Finance

Advisor/Mentor

Wayne Lee

Committee Member

Craig Rennie

Second Committee Member

Timothy Yeager

Keywords

High Yield Bonds, Leveraged Loans, Peso Pricing

Abstract

The debt capital markets for leveraged borrowers are ripe with information asymmetry, lender specialization, and borrower segmentation. In this dissertation, I explore how these factors manifest themselves and the economic consequences thereof. Essay 1 shows that adverse selection and moral hazard concerns are inherent in underwriting syndicates that differ in size and number of lead underwriters. Using a nested double selection probit model of syndicate choice, I examine the matching of issuers and underwriters and find that matches of issuer quality and underwriter reputation are positive assortative. Further, switching regressions show that yield spreads reflect uncertainty about the intrinsic values of debt issued. Yield spreads are 150 basis points higher when poor issuer and issue quality require multiple lead underwriters, but weak lead underwriter reputation constrains the size of the syndicate needed for information production and distribution. Essay 2 shows that borrowers care who are their lenders. The matches between borrowers and lenders are endogenously determined and negative assortative. Creditworthy but opaque firms will choose to borrow from specialized lenders (QIBs), who are more adept at assessing issuer quality, maintaining confidentiality of private disclosures, and monitoring. In Essay 3, I investigate the default and bankruptcy hazards of covenant-lite and fully covenanted leveraged loans over the period 1999 to Q3:2016. I show how lender specialization and borrower segmentation in the leveraged loan market is impounded in the pricing of loans characterized by low probability but high loss events. Non-bank lenders rely on screening of speculative grade rated borrowers and secondary market trading of loans to control potential agency conflicts with borrowers. Traditional monitoring is more important for bank lenders. The default rates of covenant-lite loans are lower than on fully covenanted loans, but recovery rates implied by higher yield spreads are substantially lower. In loan pricing, lenders give considerably more weight to losses when default occurs.

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