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Dollar borrowing, firm credit risk, and FX-hedged funding opportunities

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  • Galvez, Julio
  • Gambacorta, Leonardo
  • Mayordomo, Sergio
  • Serena, Jose Maria

Abstract

We explore the link between firms' dollar bond borrowing and their FX-hedged funding opportunities, as reflected in a positive corporate basis (the relative cost of local to synthetic currency borrowing). We first document that firms substitute domestic for dollar borrowing when the corporate basis widens. Additionally, we find that when these funding opportunities appear, the currency substitution is greater for highly rated firms. The willingness of highly rated firms to issue dollar bonds when the basis widens is stronger during periods of heightened demand for dollar-denominated safe assets.

Suggested Citation

  • Galvez, Julio & Gambacorta, Leonardo & Mayordomo, Sergio & Serena, Jose Maria, 2021. "Dollar borrowing, firm credit risk, and FX-hedged funding opportunities," Journal of Corporate Finance, Elsevier, vol. 68(C).
    • Handle: RePEc:eee:corfin:v:68:y:2021:i:c:s0929119921000663
    DOI: 10.1016/j.jcorpfin.2021.101945
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    More about this item

    Keywords

    Dollar bonds; Credit ratings; Corporate basis; Safe asset demand;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F3 - International Economics - - International Finance
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets

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