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Collateral pricing

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  • Benmelech, Efraim
  • Bergman, Nittai K.

Abstract

We examine how collateral affects the cost of debt capital. Using a novel data set of secured debt issued by U.S. airlines, we construct industry-specific measures of collateral redeployability. We show that debt tranches that are secured by more redeployable collateral exhibit lower credit spreads, higher credit ratings, and higher loan-to-value ratios--an effect which our estimates show to be economically sizeable. Our results suggest that the ability to pledge collateral, and in particular redeployable collateral, lowers the cost of external financing and increases debt capacity.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Financial Economics.

Volume (Year): 91 (2009)
Issue (Month): 3 (March)
Pages: 339-360

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Handle: RePEc:eee:jfinec:v:91:y:2009:i:3:p:339-360

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Web page: http://www.elsevier.com/locate/inca/505576

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Keywords: Collateral Redeployability Liquidation Collateralized debt obligations Airlines;

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References

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  1. Efraim Benmelech & Nittai K. Bergman, 2008. "Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines," NBER Working Papers 14059, National Bureau of Economic Research, Inc.
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