A comparative analysis of ex ante credit spreads: Structured finance versus straight debt finance

Abstract

This paper examines the pricing of structured finance (SF) – asset-backed securities (ABS), mortgage-backed securities (MBS), and collateralized debt obligations (CDO) – and straight debt finance transactions. Using a cross-section of 24,525 European bonds issued by financial and nonfinancial firms in the 2000–2016 period, we show that although ratings are the most important pricing determinant for SF and corporate bonds (CB) at issuance, investors rely on other contractual, macroeconomic, and firms’ characteristics beyond these ratings. We find that CDO tranches have, on average, higher credit spreads than similarly rated CB, while investors are not compensated for facing higher systematic risk components in relation to investment-grade ABS and MBS. Our results also support the hypothesis of SF transactions as mechanisms of reducing funding costs: SF transactions’ weighted average spread is lower than that of comparable CB and originating firms’ creditworthiness does not deteriorate when compared to a sample of matched firms.