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Collateral pricing

  • Benmelech, Efraim
  • Bergman, Nittai K.

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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File URL: http://www.sciencedirect.com/science/article/pii/S0304-405X(08)00204-3
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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
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505576

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  33. Efraim Benmelech & Nittai K. Bergman, 2008. "Liquidation Values and the Credibility of Financial Contract Renegotiation: Evidence from U.S. Airlines," The Quarterly Journal of Economics, Oxford University Press, vol. 123(4), pages 1635-1677.
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  36. Marshall E. Blume & Felix Lim & A. Craig MacKinlay, . "The Declining Credit Quality of US Corporate Debt: Myth or Reality?," Rodney L. White Center for Financial Research Working Papers 03-98, Wharton School Rodney L. White Center for Financial Research.
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